Lately, I’ve spent more time than usual analyzing the markets. Just like most investors, I was interested in how they will react to this Covid-19 pandemic. Do you know what caught my attention? Not the stock market rising from the ashes like a Phoenix. Or the incredible gold rally. Not even what happened to oil from February up to now. No, I’m talking about something else: soft commodities.
Stay with me, and I will tell you why the soft commodities market is the next big thing I will put money in.
Numbers don’t lie
Cocoa, coffee, cotton, sugar. Four of the goods we all use in our everyday lives. And guess what? It happens they’re among the best performing financial assets nowadays. For example, sugar prices jumped 20% since May. Cocoa, coffee, and cotton became a lot more valuable as well, posting double-digit figures increases as well.
Cocoa price graph in the last 13 months, courtesy of finviz.com
But here’s the exciting thing: between March and May, all these common goods were cheap as chips. The pandemic was taking its toll on them too. Prices were extremely low, and nothing was pointing at a change.
Naturally, I became very curious to find reasons for this sudden shift. From May until now, deep into August, the soft commodities market thrived. Just a couple of months earlier, prices were down below sea level. So, I started digging out deep in my quest to find some answers and a potentially exciting trading opportunity.
Let me tell you some of the reasons why I believe the soft commodities market is looking better than ever.
Sugar price graph in the last 13 months, courtesy of finviz.com
Supply shortages got everybody worried
Brazil and India, two of the world’s biggest soft commodities producers, are forced to deal with the harshest effects of the Covid-19 pandemic. They’re both in the top three worst-hit nations globally. Hundreds of thousands of people have already died there.
Brazil is the largest manufacturer of coffee and sugar, with tens of million bags of coffee and hundreds of million metric tons of sugar cane produced in 2019 alone. India produces the most cotton on earth. Even more than Europe makes with all its 40+ countries.
But here’s the issue. Investors anticipate supply constraints are closing in, as both Brazil and India will need to put their economies back on track when the crisis ends. With smaller supplies on the horizon due to workforce shortages, prices for soft commodities futures can only go up. Another reason for the bullish trend is that many people are stuck at home, and the demand for goods such as coffee and sugar tends to rise under these circumstances. Also, as soon as the economy starts recovering, we can only witness a boost in demand.
Coffee price graph in the last 13 months, courtesy of finviz.com
The U.S Dollar, no longer safe
The Dollar Index, which measures the power of the U.S Dollar compared to several other major currencies, has recorded its worst month in almost ten years. That spells excellent news for soft commodity prices, as a weaker Dollar makes it more affordable for importing nations to buy commodities priced in the U.S. currency.
Investors betting against soft commodities had to cut their short positions. In early August, the “performers” were the coffee shorts, with more than 19,000 contracts wiped out of existence.
Fewer bearish supporters of soft commodities mean there’s more room for optimism in this market. Together with improved market sentiment, prices should continue to rise until something truly unexpected occurs. For the moment, investors don’t expect such a thing to happen.
Game over for the gold rally – or so it seems
Gold lost 5.72% on Tuesday, August 11, marking the most significant single-day decline in seven years. It also fell below $1.900/ounce for the first time since July 24. That’s quite a negative record.
I did my homework and checked what investors believe happened. Here’s what I found out: many experts believe gold is overbought. Optimism is growing among small businesses worldwide. The risk-appetite attitude seems to return (slowly, but surely).
Don’t get me wrong: that doesn’t imply people stopped looking for safe havens. Not by any means. It just shows that gold might no longer belong in this category anymore. I think the U.S Dollar faces the same issue as well.
It always happens like this: in the beginning, investors run to what they believe is their safest bet. As soon as things appear to take a turn for the better, they shift by 180 degrees. And then other opportunities start to look more clearly.
The markets remain uncertain, as the pandemic is far from over. Now we need to protect our investments more than ever since danger looms.
What do we have left when gold and the U.S Dollar stopped proving their utility as hedging instruments? There’s only one market we can turn our attention towards. And that’s precisely the soft commodities products I’ve been talking about. I don’t know what you’re going to do, but I’m counting on them.