NEW YORK (MarketWatch) – In the shadow of a deep recession and a stock market that ended the last decade roughly where it started, the volume of commodity trading is booming.
For many investors, this shift reflects growing frustration with the performance of traditional stocks and a willingness to take on more risk as they rush to get their portfolios back on track.
“There is certainly evidence of a migration of fund managers from stocks to commodities,” said Carley Garner, analyst, options broker at DeCarley Trading LLC and author of the book “Trading in the FOREX and Futures Markets”.
Citing data from the Commodities Futures Trading Commission, Garner said major speculators such as hedge funds, commodity pools and institutions with a lot of liquidity regularly post net long or short positions in the futures markets.
Market analysts say the movement to commodities actually started years ago, when billions of dollars were earned – and lost – by dispossessed Wall Street stock and bond traders.
A list of the mainstays of the commodities world includes Bruce Kovner, the billionaire founder and chairman of hedge fund Caxton Associates, which made his fortune in the 1980s.
John Arnold also makes the list. Dubbed the king of natural gas, he announced in May that he was closing his Centaurus Energy Master Fund, the $ 3 billion fund he started with an Enron bonus in 2002 and integrated into one of the largest funds. speculative high-stakes world of energy trading.
Meanwhile, as a stark reminder that commodities trading doesn’t always work, Amaranth Advisors LLC lost $ 6 billion to its main natural gas trader Brian Hunter in 2006. See related article.
But commodity trading houses, founded on elementary commercialism, are also among the fastest growing companies in the world.
Among the largest, Switzerland-based Glencore International PLC (GLEN) (805) struck a successful $ 90 billion deal in February to acquire Anglo-Swiss mining group Xstrata PLC, making it the world’s largest exporter of coal and producer of zinc to the world.
A month later, the buying company doubled its focus on agricultural markets, paying $ 6.2 billion to Viterra Inc., Canada’s largest grain handler.
After going on an initial public offering of his company last year, the personal net worth of Glencore International CEO Ivan Glasenberg soared to $ 7.2 billion.
Back to basics, with a touch
Underlying these and other milestones in the commodities sector is a steady increase in the volume of futures trading for fuels, minerals, and food that literally underpins any economic endeavor.
According to Garner, many of today’s commodities traders have their roots on Wall Street.
The rise of commodity-based ETFs such as the United State Oil Fund USO,
the SPDR Gold Trust ETF GLD,
and the iShares Silver Trust ETF SLV,
allowed stock traders and funds to participate in commodities without actually changing industry.
“The line between stocks and futures is slowing down and the money allocated to a typical stock and bond account suddenly has instant access to commodity exposure,” Garner said.
Some commodities traders argue that the influx of stock traders and their classic strategy of buying and holding stocks has upended the pace of the futures market, where contracts inevitably expire. Too many traders who pulled out of a contract at the last minute fueled volatility and, in turn, led to some pretty extreme price moves.
The impact of this on prices is perhaps most evident in the New York Mercantile Exchange oil exchange pit, where since 2008 crude oil futures have rebounded between $ 145 and $ 82. the barrel.
Phil Flynn of PFG Best, a commodities trading company, said gold, oil and other commodities also appeal to investors keen to beat low interest rates, a lackluster stock market, or who are looking for a hedge against the US dollar in times of great uncertainty. in foreign markets.
“Commodities have become an escape valve for the global economic collapse, and the nervousness of sovereign debt has prompted investors to buy commodities as a safe haven as early as 2007,” said Flynn.
John Hyland, Chief Investment Officer of the United States Commodity Index Fund USCI,
said more and more retail investors have tapped into commodity ETFs as an asset allocation decision. Another popular choice is the PowerShares DB Commodity Index Tracking Fund DBC,
Investors have about $ 100 billion tied up in all commodity EFTs, including about $ 80 billion in gold-related products, according to data from ETFdb.com.
Flux, flux and gold
While interest in commodities will remain high, Hyland said the stock trading activity is not going away anytime soon.
“After the crash of 1929, Wall Street was not popular for 20 years, then in the 1970s it was for 10 years. [But] cycles are accelerating, ”Hyland said.
Sam Stovall of S&P Capital IQ said investor interest in gold futures has boosted volume as the yellow metal attracts investors keen to avoid currency weakness in Europe, stagnant prices. bond market returns and bleak prospects for economic growth.
Gold provides a “store of value” against inflation and deflation, he said.
Overall, the S&P 500 SPX,
is down about 10.5% since Dec. 31, 1999, while the price of gold is up about 450% to $ 1,582 per ounce, from $ 290 over the same period.
“Gold has outperformed stocks since 2000,” Stoval said. “But on a relative basis right now, stocks are trading at a relative discount to gold.”
Menachem Brenner, professor of finance at the Stern School of Business at New York University, said: “People have lost faith in almost every other instrument, so they invest in gold.
“Over the past 10 years, commodities have become a new asset class if you want to diversify beyond equities,” he said. “More and more institutional investors are arriving. It will last for years to come. “
Carley Garner warned that while commodities markets have benefited from a cyclical move in stocks, gold’s rapid 15% drop from $ 1,900 an ounce is a stark reminder that they are not. hardly a safe haven for investors looking for stable returns over the long term.
“Unfortunately, retail traders tend to seek performance in moving markets and, even worse, they often liquidate discounted assets to do so,” she said. “This type of emotional and irrational trading was evident in the fall of 2011.”
The essential ? Do your homework, be nimble, and don’t embrace your stance.