Trading commodities in today’s markets has been nothing short of difficult. While the first quarter was relatively stable, Q2 has been anything but, with volatility returning to markets and unpredictable behaviors becoming the norm. Commodity futures are already volatile on their own, but throw in rocky markets and that effect is amplified. Rather than trying to make a speculative bet on day-to-day movements of commodities, investors can look to profit from backwardated futures curves. Backwardation is the process by which near month futures are more expensive than those expiring further into the future, creating a downward sloping curve for future prices over time [see also Invest Like Jim Rogers With These Three Agriculture Stocks].
The final month of the quarter saw a fair amount of volatility as far as commodities are concerned. With a number of global factors combining, performances were spread across the board. Cotton, in particular, had a strong March, as futures prices gained as much as 3.8% over the four week period. But as April and Q2 have begun, cotton has been struck with selling pressures. April’s losses have yielded to roughly 4%, erasing nearly all of the gains that copper futures had enjoyed in the previous month [see also Dividend Special: Top Companies In Every Major Commodity Sector].
After enduring a rough year, cotton may finally have its groove back. The commodity soared to historical highs in 2010 with prices breaking records on what seemed like a daily basis, but as 2011 rolled around, futures came crashing back to earth, effectively erasing most of the gains that had been amassed in the previous year. But now that 2012 is well underway, cotton may be poised for another big year, as its futures have been some of the best performing thus far. Though cotton is down over 7% in the trailing 12 month period, this year alone has seen prices jump by over 8.2%, putting the fluffy commodity back on top for the time being. Similar to 2010, there are a number of factors combining to push up cotton prices, all of which need to be considered prior to investment [see also Ultimate Guide To Cotton Investing].
It’s no secret that most commodities had a rough 2011; even top performers like gold have not been without their blips. So when it comes time to examine your portfolio for the coming year, choosing the right commodity can be a tall order. First, it is important to note that no matter which asset you choose, it will more than likely be volatile and require active monitoring as well as stop-loss protections. But while these investments may be volatile, their benefits to an overall portfolio have earned them the right to makeup anywhere from 5% to 10% of your holdings. For investors searching for the right move for 2012, we outline three enticing commodity plays to help prepare your portfolio for a clean slate after a tough year [see also 12 High-Yielding Commodities For 2012].
Cotton, the fluffy commodity, was one of the most talked about investments of 2010. With a number of factors combining, cotton prices spiked to historic highs last year and led to a number of investors jumping in on the trend, only to get burned when cotton tanked midway through 2011. Global consumption for this year was expected to surge, but unfortunately, the expected 120 million tons of cotton use was revised down to 113 million after issues in China and Pakistan led to lower demand. As the need for cotton began to cool down, supplies ramped up all over the world, putting downward pressure on prices [see also Inside Cotton’s Epic Crash].
Numerous commodities saw healthy bull runs in 2010, inspiring investor confidence for a strong 2011. Gold for example, has continued its historic run, breaking through the $1,700 per ounce mark and then some, while oil has been on more of a roller coaster ride as far as its prices are concerned. But while a number of commodities have fared well so far this year, others have not been so fortunate. Cotton in particular, was one of the best performing futures last year, only to suffer major blows through the first seven months of 2011 as well [see also The Ultimate Guide To Gold Investing].
Today truly proved to many investors why commodities are such an important aspect of any portfolio; major equities struggled due to yet another day without a debt deal, while nearly every major commodity finished up on the day. Though the strong commodity performance was partly due to a struggling dollar, a number of other factors converged to give some futures an especially robust day as far as performance is concerned. While gold put in a positive day, oil finished relatively flat, while the UBS Bloomberg CMCI index gained a healthy 15.7 points in today’s session. Though many commodity indexes are down from their April highs, the past few weeks have slowly formed an upward trend, giving investors hope for a strong future performance.
Today saw another busy trading day, with most major equities finishing down on continued worries that Congress will not agree on a debt plan in time. The deadline to raise the debt ceiling is set for August 2nd, leaving little time for major snags or debates among our legislators. Aside from these fears, the market saw Apple (AAPL) shares touch $400 for the first time ever, much to the delight of the wealth of investors with shares in the company. Today also saw the busiest week for IPO pricing since 2007, with industries represented everywhere from “food services, biotech, energy, and defense to even farming in Uruguay” writes CNBC.
Today saw markets further their plunge as fears of a U.S. default remained in investors’ minds. As it gets closer to the August second deadline, with the government failing to make any tangible progress on the debt ceiling, investors are growing more worried, which has sent equities on a roller coaster ride over the last few weeks. As for commodities, gold saw yet another historic breakthrough today as it finished above $1,600 per ounce for the first time ever. Gold’s climb proves that investors are more comfortable seeking safe havens for the time being in the precious metals arena, as they quickly move out of equity positions to wait out the storm. In aggregate, today saw the UBS Bloomberg CMCI index finish down 7.6 points while the S&P GSCI gained roughly 5.5 suggesting that commodities were pretty mixed overall.