5 Lessons From the Inside Commodities Conference

The Inside Commodities Conference took place in Chicago last week, and there was no shortage of interesting speakers and heated debates over the future of varying aspects of the commodity world. The day was chock full of presentations and findings on the commodity world, some of which were new or unique theories and ideas. We were able to boil it down to the five most important lessons and information conveyed at the conference, to help our readers stay up to date on the fast paced environment of commodity investing [for more commodity news and analysis subscribe to our free newsletter]. 

  1. Decay vs Roll Yield: This idea was presented by Matt Hougan and Dave Nadig of Index Universe, and it certainly changed the way we think about commodity futures. For the most part, this theory applies to futures-based ETFs and other similar products, as their automated monthly rolls have been points of contention for quite some time. In a contangoed environment, when a futures ETF completes its automated roll, many assume that the fund instantly loses value, but Hougan and Nadig refuted this point. They state that you only lose money if the spot price does not rise to the purchase price over time. For example if this month’s crude oil contracts are worth $100 and next month’s $110, your ETF will sell out at $100 and buy back in at next month’s higher price. For the time being, you still have the same amount of money invested, you simply bought at a higher price. For every day that oil does not rise, you steadily lose money given that you purchased contracts well above spot. Should prices jump up to $110, you lost nothing, but if they are unable to rise then your value decays. They stated that roll yield is an incorrect terminology, and investors should instead think of this process as a gradual decay than an instant loss. We should note that the idea was contested by audience members [see also 25 Things Every Financial Advisor Should Know About Commodities].
  2. Renewable vs Non-Renewable Commodities: This was a relatively simple point but is one that investors can very easily overlook. The correlations, behaviors, and performance of renewable resources versus non-renewable ones is quite different. Whether you are using a commodity as an inflation hedge, or simply making a speculative play it is important to take into consideration whether the resource is renewable or not, and take a close look under the hood of its respective performance and correlation to markets.
  3. Inflation Hedges, Which Work?: Many are quick to assume that commodities are all strong hedges against inflation, as that has long been a general rule of thumb across the industry. But what was presented was that different assets have very different reactions to a general rise in prices. Gold is perhaps the most popular inflation-hedging asset, but in recent years it was actually among the bottom performers with regards to inflation. Now, this too was met with opposition from the audience as the definition for inflation is a highly contested subject. It is widely agreed that government CPI figures do not take nearly enough into account to be a reliable inflation benchmark. But arguments over what is needed to be included to measure real price increases put an asterisk next to some of the findings from this presentation [see also Three Alternative Sources for the Current Inflation Rate].
  4. The First Commodity Note Dates Back, Way Back: This was more of an interesting tidbit than a lesson, but it is always good to get the background on an industry as popular as this one. The first commodity-linked note or contract dates back to around the 19th or 20th century BC. The notes from those times were almost always concerned with agricultural products, often in the grains sector. Moving forward, the first note in the U.S. made an appearance in 1780, as many soldiers were compensated with notes worth certain amounts of different commodities like wheat and other foods.
  5. Gold Storage Overseas Trend: The concerns about a gold confiscation in the U.S. seem to have gotten marginally worse over the years. While the the majority of the panelists and experts agreed that the odds of an actual gold confiscation are almost zero, they did point out an interesting trend. Peter Hug of Kitco noted that a large amount of his clients have been moving their gold overseas, a trend that has been developing for two years. He stated that more recently has even seen high wealth clients hop in on the trend. Where do they all go? Hug stated that the majority of them have moved into Chinese holdings, as he hypothesized that if there ever was some sort of gold confiscation, the Chinese are probably the least likely to cooperate with the U.S. as far as which citizens hold what in Chinese vaults. Hug also made a point that if you are worried about some sort of confiscation, a product that invests in gold overseas is probably not a good option, as it is still trading on U.S. exchanges, making it susceptible to some sort of collection by the government. After re-iterating the unlikelihood of an actual confiscation, he stated that the best way to protect yourself is to own physical bullion stored in other countries.

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Disclosure: No positions at time of writing.

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