Bubbles, tiny bubbles are everywhere right now. The thing about “tiny bubbles” is they usually get a lot bigger before they pop. So far in 2021, I have seen three bubbles burst, with the first being hedge fund managers frantically covering their excessively short “high beta – high short interest” stocks, i.e., GME, AG, AMC, you know the names. The second was the rotation out of momentum (stay-at-home stocks) and into energy, financials, and reopening names. The third bubble that is still unwinding is the “bond-bubble, ” which affects long gold positions. I have recently had many people ask me what narratives they should be watching and how they can hedge themselves. If you would like to be up to date on the developments of our strategies in the futures and commodities markets, please register for a Free two-week trial by clicking on the link here: The Blue Line Express Two-Week Free Trial Sign up.
Let’s say I get approached by “XYZ Commodity Fund” and hire me as their asset manager. They will ask me what assets I like, my concerns, and how we can protect the position. The first thing I would do is look at the economic cycle we are in and where interest rates are. Since August, we are in a “Reflationary environment” where growth and inflation accelerate, and historically as this occurs, the FED turns hawkish in time. The part where the FED “turns hawkish” is when the market will make its transition into the next economic cycle because growth will stall. Now that I have that hard part figured out, I will need to list my assumption of what works and what doesn’t, and I can back-check it against performance data since August. Here is what I would write down, and here are the markets I would be watching.
10-Year Note (As yields rise, the price of the 10-Year declines)
6 Month performance -4.75%
Coincidently, when yields bottom and growth begins, that generally marks the top in Gold, and conversely, when yields peak and growth peaks that markets the bottom in Gold.
Gold (As yields rise, the price of Gold declines)
6 Month performance -12.15%
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As the economy reopens, people will begin to travel, and demand consumption of energy will increase. Crude Oil is often a great proxy for business activity because it is “cracked” into other products that measure demand, such as Gasoline and Heating Oil
6 Month performance Crude Oil +66% Gasoline +75% Heating Oil +68%
What other markets are we watching?
Prices of Raw Building Materials have been rising such as Lumber, Cotton, Copper
6 Month performance Lumber +36% Cotton +34% Copper +33%
Food costs have been steadily rising, such as Bean Oil, Corn, Sugar
6 Month performance Bean Oil +58% Corn +52% Sugar +37%
That should give you plenty of ideas of different ways to look at how changes in economic growth, inflation, yields affect various commodities. Also, we still have some complimentary 2021 Futures Calendar & Reference Guide with a limited supply. If you would like one, this guide is your go-to resource for government & industry report dates, contract specifications, futures, and options expiration dates. *Available to U.S. residents only. You can request yours here: Blue Line Futures 2021 Pocket Calendar.
Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.