Checking in On the 3 Kings of Commodities

• The Softs sector continues to dominate the commodity complex as far as bullish fundamentals go. 
• However, a strong case could also be made for gold and crude oil, for a variety of reasons. 
• As for King Corn, it doesn't have the bullish fundamental picture to attract long-term investors at this time, but that could change over the coming months. 

With the end of September growing larger on the horizon, meaning Q4 is set to begin in the financial sector, it’s a good time to take a look at what the 3 Kings of Commodities (gold, crude oil, and corn) are telling us. As I’ve talked about before, some of the investment money being generated by US stock indexes continuing to print new all-time highs could make its way to the commodity complex. If so, investors are going to be looking for markets with bullish long-term fundamentals. The past few years have seen most of the interest in Softs, due in large part to a variety of weather issues, and the sector still boasts a number of inverted forward curves.

• Cocoa: The nearby December issue is priced at $7,859 (per metric ton) with the Dec25 contract priced at $5,198
• Lumber: The nearby November contract is sitting near $535.00 (per 1,000 board feet) with the January issue priced at $549.50. However, deferred contracts move back into a carry. 
• Sugar: The March contract is priced at 23.09 (cents per pound) with the March 2025 issue priced at 20.01.
• Coffee: The nearby December contract is priced near 268.50 (cents per pound) with the Dec25 issue priced near 251.65.
• And finally Orange Juice: The nearby November issue sitting at 489.85 (cents per pound) with the first deferred January issue priced near 478.00.

But what about the 3 Kings? Could these major markets step in and take some of the investment money away from the Softs sector. Let’s ask Mr. Owl (of “Let’s find out…” fame). 

The most fundamentally bullish of the 3 Kings is WTI Crude Oil. As of midday Tuesday the market’s forward curve is showing a strong inverse (backwardation for the New Yorkers in the crowd) with the spot November contract (CLX24) priced at $71.20 (per barrel) with the first deferred December contract at $70.50, January at $70.00, and so on. While the market shows a seasonal tendency to trend down from the first week of October through the third week of December, losing an average of 15%, 2024 saw the spot-month contract confirm an intermediate-term uptrend the second week of September, quickly rallying off its low of $65.27 to a mid-month high of $72.49. What’s interesting about WTI crude oil is its untapped potential. While fundamentals remain bullish, again as indicated by the backwardation of the market, funds haven’t been buying into the market. The latest CFTC Commitments of Traders report (legacy, futures only) showed funds holding a net-long futures position of 145,238 contracts. This may sound impressive, but it is only a few thousand contracts off its recent low of 140,000 contracts and its multi-year low of 138,000 contracts. Once funds start to move with fundamentals crude oil could get a lot more interesting. 

As I was writing this piece, an email came in with the subject line, “Welcome to escape velocity”. The summary read, “Gold hits escape velocity…”, a fitting description as King Gold seems to have “slipped the surly bonds of earth and danced the skies on laughter-silvered wings”[i]. A look at the continuous monthly chart for the Cash Gold Index (GCY00) shows the market registering a new high of $2,653.78. Recently I took part in the weekly Kitco Gold Poll by paraphrasing Willy Wonka to describe investment buying in gold, “Yes! The danger must be growing for the rowers (investors) keep on rowing (buying) and they’re certainly not showing any signs that they are slowing!” The latest Commitments of Traders report showed funds held a net-long futures position of 310,000 contracts, the largest net-long position since early March 2020. Much of this is adding long futures, with the latest reported position of 370,000 contracts the largest since February 2020. There are many catalysts for gold’s rally, but to me the key is investors are expecting agents of chaos to ramp up global violence in a last-ditch attempt to disrupt the US presidential election. This group that includes BRICS and OPEC+ seems to have backed the wrong elephant, with attempts to break world politics and economics having failed to this point. This answers the question as to why investors would continue to buy gold at these price levels, for the danger must be growing. 

But what about King Corn? As I talked about recently, the December 2024 futures contract (ZCZ24) completed a bullish technical reversal on its long-term continuous monthly chart at the end of August. This told us that the major downtrend that had been in place since the end of May 2022 had come to an end, similar to what was seen back in October 2014. The question is, though, does corn have the long-term fundamentals to convince investment money the market is a long-term buy? At first glance the answer is “No”. But there is a sliver of a chance. A look at deferred futures spreads shows a consistent neutral reading, covering between 34% and 66% calculated full commercial carry. This hasn’t changed since late April, meaning the majority of the growing and harvest season for the US 2024 crop. The outlier is the May-July futures spread covering less than 33% calculated full commercial carry since mid-August. This jumps out at us because it’s the May-July spread where we get a read on the commercial opinion of Brazil’s next crop. Recall from my summary of the recent panel discussion on global grain that the concern in Brazil is the effects of La Nina reducing production potential. Will this be enough to convince funds to eventually go long the corn market or do just enough buying to cover the existing net-short and move to the sidelines. Time will tell. 

[i] From the poem High Flight by John Gillespie Magee Jr. 

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