Investors aren’t limited to only investing in the S&P 500 and the Dow Jones Industrial Average. Every week we share the market trends we are following. We are interested in whether the trends in those markets are continuing or if they are experiencing a temporary or complete reversal.
When we identify trends, we are only concerned about the price data and what it says about any given market. We don’t need to know why a trend has formed to invest, but our human nature wants to understand what is driving them. Each week we try to offer some perspective on what we think the most substantial moves are and what critical drivers are behind them. Here we look at what is going in our globally diversified, non-correlated Crystal Bay Ubitrend strategy.
Last week’s continuing trends:
- Nasdaq Index
- Copper
- Japanese Government Bonds
- European Rapeseed
- Gold
Last week’s reversing trends:
- Soybean Meal
- Natural Gas
- European Maize
- Coffee
- Oats
What we are taking note of:
If they give any thought to commodities at all, most investors think mainly of Oil and Gold. The ‘Futures’ section of the daily Market update on the Wall Street Journal website lists Oil and Gold together with two stock market indexes as the only futures contracts worth following.
We will tackle Oil in a later update and focus on Gold here.
In my investing career, I noticed that Gold is polarizing. Investors divide into two loud camps, goldbugs who always want to buy Gold, and gold haters who always want to short Gold. They all made up their minds decades ago, and no amount of evidence will make them change their opinion. Asking either of these two types about the gold market is a painful experience. Over the long term, each is wrong about half the time.
Fundamental investors try to forecast gold supply and demand and predict gold prices using their models. I too went through this phase. The results were embarrassing. I thought that maybe I was uniquely inept, but a decade long acquaintance with leading gold investors in North America restored my self-esteem. The failure of fundamental approaches was universal.
When I started looking at systematic investing in commodities, Gold came up early on as an example of a market that displays consistent long-term trends. Looking at a 20-year gold price chart, we can see a strong up market from 2000 to 2012, followed by a down market that lasted until the end of 2018. Since then, Gold has been on a tear again.
It is tempting to come up with stories that explain the price moves in hindsight but Gold’s performance does not line up neatly with economic cycle or monetary policy, let alone with production schedules of the major gold miners. Investor psychology and long-term inflation expectations seem to be the major drivers and are impossible to forecast. However, they’re slow to change, and that creates an opportunity for trend-following algorithms to identify turning points and establish positions that can ride the price momentum for years.
How are we heading into next week?
The Crystal Bay Ubitrend strategy added to its metal positions by going long in Copper. In the recent past, copper consumption has been dominated by Chinese domestic demand, both for construction and infrastructure projects. Copper sold off after China started to shut down its economy in response to Covid; the effectiveness of Chinese response has manifested itself in revived industrial production and now in growing demand for raw materials including Copper.
The Crystal Bay Ubitrend has its biggest exposures in the rates and agriculture sectors, followed by metals. Energy, equities, and currencies have one position each.
