The commodity key

  • Commodity prices trended higher in Q4, kept pace with equities
  • A sign of looming inflationary pressures?
  • Commodities, commodity ETFs, and commodity stocks are not the same

Is the US economy’s long-dormant x-factor, inflation, getting ready to make some noise in the new year?

Well, anything can happen, but market watchers have been waiting for years to attach an adjective other than “tame” or “muted” to inflation. That said, recently rising commodity prices have prompted some analysts to wonder whether 2020 will usher in at least a temporary inflation upsurge that could cause the Fed to rethink its current hands-off monetary policy.

But with the S&P Goldman Sachs Commodity Index up around 8% in the final three months of 2019—almost exactly as much as the S&P 500 (SPX) stock index—and with particularly strong Q4 rallies in crude oil (+14%), cotton (+13%), lumber (+13%), and coffee (+27%), traders may be less concerned about the inflation/Fed question and more interested in monitoring these markets for potential trade opportunities in 2020.

Even gold, which drifted lower for the past three months, recently broke out to the upside—perhaps re-energizing gold bugs who had swarmed the metal’s 20%-plus Q3 rally:

Chart 1: February gold futures (GCG0), 5/31/19 – 12/31/19. End-of-year breakout.

Source: Power E*TRADE

A couple of thoughts traders should keep in mind:

1. Don’t confuse commodities with stocks that are tied to those commodities. For example, an up move in gold or oil doesn’t mean every gold-mining or oil-drilling stock will rally in lockstep; some will, some won’t—or at least not to the same extent. Equity traders looking for straight-up commodity plays outside the futures arena may want to consider commodity ETFs.

2. There doesn’t need to be a “pan-commodity” bull market for trading opportunities to develop in commodity futures. Commodities are not a true asset class (what’s copper got to do with corn, for instance?), they’re a collection of unique markets, and price moves can develop in one market and not another.

Sure, an inflationary environment in which almost all commodities rally would make things easy for traders who want to buy, watch it fly, and say goodbye, but that type of market hasn’t occurred in more than a generation.

In the meantime, it’s about taking advantage of individual opportunities when they present themselves, whether it be in futures, commodity ETFs, or select stocks. Recent market action has shown commodities can move when you least expect it.

Market Mover Update: The S&P 500’s (SPX) 28.88% return last year made it the fifth-strongest year for the index since 1960, and its best year since 2013.

Today’s numbers (all times ET): PMI Manufacturing Index (9:45 a.m.), FOMC Minutes (2 p.m.).


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1 The Fed could face a possible ‘inflation scare’ in 2020 with commodity prices on the rise. 12/30/19.

What to read next...

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