James Montier – with some observations about commodity markets

Posted on 27 May 2010

Great read from James Montier at GMO (via Zero Hedge 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 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%:

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

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6 responses to James Montier – with some observations about commodity markets

Thursday links: avoiding anchoring Abnormal Returns says:

May 28, 2010 at 3:05 am

[...] Commodity futures investing doesn’t work when the roll yield is negative. (Data Diary) [...]

Crude Oil Prices Per Barrel says:

May 28, 2010 at 10:12 am

Commodity Focus: Commodities Markets Headed For The Biggest Annual Decline; US Crude Oil Future; OIl Price Movements; US Gold Futures…

I found your entry interesting do I’ve added a Trackback to it on my weblog …

More on the financialization of commodities Abnormal Returns says:

June 8, 2010 at 4:26 am

[...] Data Diary highlights two great charts by James Montier that highlight this relationship and the effect it had on the roll yield. Prior to this period the roll yield had a positive effect on commodities investing via futures, in recent history it has been a detriment. Data Diary goes on to argue that: See in my day, commodities were in backwardation more often than not. What happened? It’s a result of the overpowering of physical markets by financial participants. And I’d argue that this investor dominated market structure increases the probability of extreme volatility in commodities prices. [...]

Commodity prices – the grotesque in the attic | Data Diary says:

February 4, 2011 at 11:45 am

[...] demand for commodities is something that we have looked at before (here and here and here) so we won’t labour the point. Suffice to say, the current run-up in the prices of [...]