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Futures: Some Commodities Sporting Double-Digit Gains

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September 29, 2016
Corn: A look at futures and commodities that investors may want to track.

As the old market adage goes, there’s always a bull market somewhere. In fact, in the commodity markets in 2016, there have been some raging bull markets. That’s why experienced and active stock traders looking to expand their trading horizons might want to consider checking out the commodities markets. The first eight months of 2016 saw a number of double-digit moves in several key commodities.

Big Picture

The Dow Jones Commodity Index climbed 8.74% through August 24. This index is a broad measure of commodities; it’s composed of 24 exchange-traded futures contracts including energy, agriculture, livestock, and metals. Here’s a snapshot of some of the commodity market gainers and losers so far in 2016.

Gainers
Sugar +41%
Silver +33%
Orange juice +32%
Gold futures +24%
Soybean meal +19.62%
Soybeans +6%
Crude oil +14%
Natural gas +12%
Coffee +8%

Losers
Copper -3%
U.S. dollar index -4%
Cocoa -5%
Lean hogs -9%
Live cattle -12%
Corn -13%
Wheat -18%

Year-to-date data through August 25, 2016. Past performance does not guarantee future results or success. Data source: Barchart.com.

Ways to Gain Exposure to Commodities

These days, traders have a plethora of investment choices and can take a position or express a market opinion not only through futures contracts, but also via a wide variety of commodity funds. For experienced stock traders, funds can be more accessible because some of them trade like stocks.

Let's take a quick look at some of the key fundamental and technical drivers for a few of the commodity markets. This is just scratching the surface, but it may whet your appetite to learn more.

Sugar: The sweet stuff is up 41% through late August. Is your favorite candy treat about to get more expensive? Maybe.

The sugar market is considered one of the "soft commodities." Others include coffee, cocoa, and orange juice. Sugar futures prices hit fresh four-year highs in July, fueled in part by the simple law of supply and demand. Global consumption is forecast to outpace sugar production in 2016 and 2017, according to the U.S. Department of Agriculture. 

Global consumption for 2016 to 2017 is forecast at a record 174 million metric tons, and even through production is climbing—up 4 million tons at 169 million metric tons—it still leaves a gap, which puts pressure on the global sugar stockpile. Brazil is the world's largest producer of sugar. It’s also worth noting that Chinese consumption has grown.

Precious metals: Silver was up 33% and gold up 24% through late August. The first eight months of 2016 saw investors buy into precious metals. Silver, often called a "poor man's gold" due to its lower price per ounce, outpaced the gains in the yellow metal. Concerns about the impact of negative interest rates worldwide and traditional safe-haven flows seems to have boosted precious metals this year.

In addition to its safe-haven status, silver also has industrial applications, which makes it more sensitive to economic cycles than gold. For instance, when gold has risen, silver historically has generally risen about 2.7 times as much, but when gold fell, silver has fallen about twice as much. In crisis periods, gold can rise while silver falls. This last happened in August 2015 around the Chinese stock market volatility, but also occurred during the financial crisis, tech bubble burst, Black Monday, and the early 1980s recession, according to Jodie Gunzberg, global head of commodities and real assets at S&P Dow Jones Indices.

Crude oil: The energy markets have posted a strong recovery in 2016, with New York crude oil futures climbing from near $26 per barrel in February to just above $51 per barrel in June. The weaker prices in early 2016 depressed overall U.S. production levels as the falling prices made drilling less profitable.

This may be a classic case of the traditional commodity boom and bust cycle. As the old saying goes: the best cure for high prices are high prices. The opposite is true as well. During the boom phase of any commodity market, high prices encourage production. New companies get involved, eager to cash in on the high price points, which ultimately results in more supply. Too much supply, even with the same amount of demand, can of course ultimately depress prices. As prices fall, there comes a point when it’s no longer profitable to drill, mine, or plant whatever commodity is in question. Have low prices finally cured the low price problem in crude oil? Stay tuned.

There’s likely to be plenty more volatility and potential opportunities in the commodities markets for the remainder of the year. So for investors looking for diversification, or even opportunities away from the stock market, consider taking a closer look at commodities. Maybe start by tracking some of the more actively traded futures contracts such as gold or crude oil. You never know when an opportunity might present itself.

Futures trading is speculative, and is not suitable for all investors.  Please read the Risk Disclosure for Futures and Options  prior to trading futures products. Trading privileges subject to review and approval. Not all clients will qualify.

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