Rising commodity price

[sylpha]

Hello there,

Is there a strategy/portfolio could benefit from rising commodity and energy price? I am not aware of any strategy buying commodity ETFs (maybe just I don’t come across them). Thanks.

[Mark Vincent]

The closest is GSRS but it’s not even in commodities right now. The problem is over the long term energy and commodities asset correlations do not benefit equity returns and sharp ratios like Gold and silver. The volatility is also high and that creates other problems. The best you can do is build your own strategy in QT. I have 3 different strategies I use.

– Metals
– Energy
– Commodities

There is some overlap depending on ETF you use to create them. I also use highly liquid ETF you can find almost any commodity but many are low liquidity (Vol<100k).

These 3 I used in a strategy of strategy just like LI Strategy of Strategy.

Cheers,
MV

[Mark Vincent]

Sorry that should have said:

The problem is over the long term energy and commodities asset correlations do not benefit equity returns and sharp ratios like Gold and Bonds.

Not Silver.

[Frank1 Grossmann]

I already tried to build strategies which selects the top ETFs of the below list, I could however never find any strategy which really worked. The reason was the very high correlation of all commodities and the fact that most of them have commodity Futures as underlying which are most of the time in contango due to high storage costs. Due to this contango each future roll is expensive and if you look at these commodity ETF charts, then they all tend to go down over longer periods.
Regards Frank

GLD, Gold
SLV, Silver
JJC, copper
USO, US Oil
PPLT, Platinum
PLTM, Platinum
UNG, US natural gas
CORN, corn
SOYB, soya bean
WEAT, wheat
COW, livestock
JO, coffee
KRBN, carbon
NIB, cocoa
JJN, nickel
BAL, cotton
JJU, aluminium
JJT, tin
GRU, grain
LD, lead
FUE, Biofuel

[Mark Vincent]

Frank,

What if your hypothesis is that hard assets will rise? I just use the same type of Strategy as 0 LI strategies of strategies and add Metals, Energy and commodities. During 2020 the strategy was rarely in these 3 hard assets but during 2021 it has always been in at least one of them. The system is picking them purely on it’s price action. When the price action goes down the system won’t pick any of my hard asset models and picks the other LI strategies.

I think this is cherry picking winning assets but if hard assets continue to rise I will benefit if they dont’t the strategy will kick me out without to much of a loss.

Cheers,
MV

[Frank1 Grossmann]

You are right, in combination with other asset classes commodities may be a good diversification. This way for most of the time you will be mainly invested in equity but you can still profit from the relatively short periods commodity prices are rising. In order to reduce volatility a good addition are ETFs like DBC, DBB and DBP.
Some of the above commodities im my list have very high volatilities 40+% so that you should use SRRP mode (risk parity) if you do a Top x commodities strategy. In general strategies work best if the different assets have similar volatilities.

[Mark Vincent]

Thanks Frank,

I took your advice for my energy strategy using the following Symbols:

Name Ticker
First Trust Natural Gas ETF FCG
United States Brent Oil BNO
United States Oil USO
SPDR S&P Oil&Gas Explor&Prodtn XOP

I changed it to SRRP works much better.

My next question is what criteria do you use to add or subtract a asset from a strategy? You already mentioned similar volatilities. Do you look for high correlation between assets or low? What other criteria do you look for? Is it more of a Hypothesis that these assets will rise in price?

Cheers,
MV

[Frank1 Grossmann]

These commodities are in general highly correlated and differently to equity they only rise for short periods. Most of the time they go down all together. So, to make a working strategy you need to include some other assets for these long down periods. Equity is good as equity normally goes up 80% of the time and only goes down fast 20% of the time.
In general, I don’t think commodity is good as a permanent investment because of the high underlying Future roll losses.

[Mark Vincent]

My guess that commodities would rise was correct and using a strategy like 0 LI strategy of strategies would put you mostly in commodities using SRE 3. Unless you just put all commodities into one strategy then you would have about 33% commodities. I chose to increase the number of strategies selected from 3 to 7 since I have 11 strategies in total. I am also using DRRP with “TAIL” as the hedge about 15%. It is working well (I’m beating SPY on every metric for 4 months) and keeps the commodity, metals and energy around 35% which is still very high but it’s the only thing that is working right now. This is a very short time period but I still think over the next couple of years commodities will rise with a lot of volatility. If I am right the model will beat SPY.

Is anyone else using commodities and how are you using them?

Thank you,
Mark V.

[Frank1 Grossmann]

I am invested in Light Crude Oil via the CL Future. Instead of buying CL right away I sell delta 30 CL put options about 30-45 days away and I roll these if they reach 80% profit or loss. The premium paid by these options is very high.

[Mark Vincent]

Thanks Frank I need to learn how to trade futures. I use BNO, XOP and USO all hedged with puts. Puts are very expensive right now.

[Mark Vincent]

Does anyone think we are in a commodity supercycle lasting years?

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