But, argues James Butterfill, this bodes well for the commodities complex over the longer term.
Indeed, speaking at the firm’s investment conference in London, ETF Securities’ head of research and investment strategy argued that the level of bearishness is one of a number of contrarian indicators pointing to eventual better times ahead.
As can be seen by the graph below, he said, which measures net futures positions for all commodities, the markets are close to their most bearish in history. And, there are a number of similarities between the current situation and the one seen in 1998.
“The data suggests that net futures lead commodity prices by three months,” he said.
Admitting that sentiment is a much more important driver than fundamentals within the commodities markets, Butterfill does point out that what is happening at the coal face does have a bearing on that sentiment.
And, here too there have been a couple of movements that could prove instructive.
“Many commodities are now trading below their marginal cost of production, suggesting it is only a matter of time before we begin to see supply side destruction occur. In fact we are already seeing anecdotal evidence of this,” Butterfill said.
Of course, in commodities, as with all other markets, the big unknown is liable to be the movements of the Fed – whether or not further rate hikes are forthcoming and the impact that they have.
But, here too, Butterfill points out, the news isn’t all bad for commodities.
As the graph demonstraes, commodities have historically done well in rising rate environments.
