James Montier – with some Observations About Commodity Markets

Great read from James Montier at GMO (here).

It includes some data on commodity futures markets that follows up nicely on our thoughts from the other day (here).

First up – a chart of the percentage of the futures market accounted for by speculators:

Commodity Speculators

% of the commodity futures markets accounted for by speculators

As a result of the rising influence of speculators, Montier adds:

this has altered the term structure of commodity futures, such that contango is considerably more common than backwardation. Indeed, 24 out of the 29 commodities we checked showed contango patterns

And this has changed the return dynamics of the commodity futures markets – in the period 1970-2000 annual returns averaged over 10%, in the period 2000-2010 it was more like 5%:

Breakdown of commodity returns

Breakdown of the total return to commodity futures investing

Raises an interesting question – what is the opposite of a carry trade?

In-house Analyst
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