Peak Bullishness in Commodities. Sentiment in broad commodities certainly has recovered over the last year having risen 20% from their lows in early 2016. It now looks like sentiment has moved from peak bearishness to peak bullishness. It implies that we could see a short-term setback in commodities as markets cool-off, although we believe the fundamentals remain attractive for the longer-term.
We use the Commodity Futures Trading Commission (CFTC) data to measure the net sum of all non-commercial long and short positions in an effort to understand current sentiment: how bullish or bearish investors currently are. Since the data begun in 1995 there has been a close correlation between movements in this CFTC data and prices. In early 2016 we witnessed what looked like the lowest sentiment since 2002 after continued worries over Chinese growth and the threat of interest rate rises. This coincided with the lowest prices since 2002.
CFTC positioning is high in many commodities, and it does look like we have reached peak bullishness in 2017. If you look across the commodities spectrum you can see that much of this stratospheric rise has been due initially to gold, silver, copper and now predominantly crude oil where speculative positioning is very close to 3X standard deviations above its long-term average, an extreme level.
Industrial metals are where we have seen the smallest rise in speculative positioning and where valuations are the most attractive. China consumes close to 55% of industrial metals globally at present so economic growth is very important for industrial metals outlook. We have created our own proxy for growth in China that incorporates bank loan growth, rail freight volumes, electricity production, retail sales, air travel and internet usage.
It implies that Chinese GDP growth is well below the official figures but crucially that growth is stabilising. Coinciding with this improvement in growth, we have seen a sharp rise in industrial metals consumption.
In a broader context for commodities, given that prices are generally below the marginal cost of production, global growth continues to improve and we are seeing the early signs of supply side destruction, the fundamentals remain intact. It just maybe worth waiting for speculative positioning to cool down a little bit.
James Butterfill, Head of Research & Investment Strategy at ETF Securities
James Butterfill joined ETF Securities as Head of Research & Investment Strategy in 2015. James is responsible for leading the strategic direction of the global research team, ensuring that clients receive up-to-date, expert insight into global macroeconomic and asset class specific developments.
James has a wealth of experience in strategy, economics and asset allocation gained at HSBC and most recently in his role as Multi- Asset Fund Manager and Global Equity Strategist at Coutts. James holds a Bachelor of Engineering from the University of Exeter and an MSc in Geophysics from Keele University.
