Commodities: Returning to Basics

In a recent discussion, I expressed my keen interest in commodities for the upcoming year and promised to provide more substance to my argument.

The narrative behind the decline in commodity prices revolves around reduced consumption due to economic struggles in both China and the Western world. While these declines are warranted, current prices have reached a level where any unforeseen positive developments could trigger market some serious rallies.


Geopolitics, even after the Russian invasion of Ukraine, have not favored commodity stability, as the initial panic buying rapidly disappeared. We also went through a period of elevated interest rates which due to carry costs have constrained the activities of both commodity dealers and speculators.


Government policies wield considerable influence on commodities, with various nations taking different approaches during economic and political turmoil. Some, like India last year, impose restrictions on exporting staple commodities to enhance food security for their populations.


Others, as we are seeing in Germany, wage war on farmers under the guise of environmental protection. And let us not forget the civil conflict that erupted in Sri Lanka due to farmers resisting impractical and costly green policies.


It seems absurd that, in the name of securing our children's future, we are compelled to make everyone's food more expensive. It is madness in my opinion, and I definitely do not subscribe to blindly following the directives of figures like Goddess Greta.


Despite the current focus on gold and oil, other commodities have demonstrated significant movements. Cocoa, for instance, surged from $2400 to an astonishing $4400 per tonne, similar to the scale of BTC's movement in 2023. Sugar experienced a substantial increase from $16.80 to $28.00 before retracting to $20.00, offering profitable opportunities for speculators. Coffee witnessed notable fluctuations, moving from 145 cents to 200, back to 145 cents, and then hitting 200 again, presenting ample volatility for speculative traders.


These examples highlight the profit potential within commodity markets, extending beyond the commonly traded gold and oil. While we may not be entering a super-cycle for commodities due to the lingering economic downturn, it is unwise to overlook the potential these markets hold and how dynamic they can be when awakened.


Consider this: EUR/USD, one of the most traded instruments, has exhibited a narrow range of 1.05 to 1.10 over the past 12 months – hardly noteworthy. Amidst political and economic uncertainties, exploring tangible commodities, influenced by supply and demand or adverse weather conditions, could enhance portfolio diversification and performance.


Personally, I hold physical gold and silver as a safeguard against threats to financial independence, particularly from Central Bank Digital Currencies (CBDC). Whilst the dollar value is important, and I remain bullish on precious metals and plan to augment my holdings during substantial dips. Physical metals are not as susceptible to government shenanigans as crypto currency devotees would have you believe.


Non-ferrous metals like aluminum and copper remain weak due to diminished Chinese manufacturing and consumption. Although values may further decline this year, short-term plays might prove very lucrative if we can catch the anticipated corrections and rallies.


Similarly, grains and beans haven't been exceptionally thrilling, but with consistent demand, any shocks are likely to stem from the supply side, presenting bullish opportunities. Food, being a fundamental necessity, is a tangible investment, and for those who believe it, considerations like global warming or carbon reduction could impact food production. After all, carbon is plant food.


In conclusion, while commodity speculation, beyond gold and oil, might not captivate many young investors, these products can offer excellent profitable opportunities over the course of this year.


I realize the experts predict as 6 or 7% drop in commodity prices this year. However, I view any weaknesses as opportunities to enter certain commodities, given their relatively limited downside and the potential for explosive value increases in the face of unexpected shocks.


That said, please do not chase Cocoa any higher. I am looking at some May put options and I might even go short, because a correction cannot be far off.

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