The raw material markets moved higher in the third quarter of 2020 after the global pandemic caused a deflationary spiral taking the prices of most assets lower in Q1 and a recovery in Q2. The commodity asset class consisting of 29 of the primary commodities that trade on US and UK exchanges moved 17.77% lower in Q1 than the level at the end of the year that ended on December 31, 2019. In Q2, it recovered by 13.75% and added another 12.04% in Q3 but was still 1.08% lower over the first nine months of this year. In 2019, the asset class gained 10.98%. In 2018, the asset class lost 6.82% of its value.

There were twenty double-digit percentage gainers in Q3, with five gaining over twenty-five percent for the three months. A total of nine markets were double-digit percentage gainers over the first nine months of this year. Five commodities markets posted double-digit percentage losses in Q3, but there were seven double-digit losers through the first three quarters of this year, which reflects the high level of volatility in markets. Winners outnumbered losers in the third quarter that ended on September 2020, by a margin of over three to one. Over the first nine months of this year, twenty-one commodities posted gains compared to eighteen products with prices below the level at the end of December 2019.

The U.S. dollar is typically a significant factor when it comes to commodity prices, as it tends to have an inverse value relationship with raw material prices. The dollar index posted a 3.52% loss in Q3 and was 2.22% lower for the year. The dollar index was 0.34% higher in 2019 after moving 4.26% higher in 2018, which followed a 10.23% decline in 2017. The dollar fell in Q2 and Q3 as the interest rate differential between the dollar and the euro narrowed dramatically.

The March 3, 2020, fifty basis point cut led to a decline in the Fed Funds rate to zero less than two weeks later. Quantitative easing is back, and more substantial than ever in the US and Europe as central banks seek to stabilize markets until scientists can develop treatments and a vaccine for the virus. The market action was a symptom of the virus, unlike in past risk-off periods where economic events were the root cause. The Fed continued to signal that interest rates would not rise anytime soon in Q3. The central bank told markets not to expect any hike until 2023. Moreover, the Fed shifted its 2% target rate for inflation from a line in the sand to an “average” for the metric. The central bank is encouraging inflation with its policies.

The first quarter began on an optimistic note as the “phase one” trade agreement and the path to Brexit lifted hopes of global growth. The coronavirus started in China, and its spread across the globe caused a tsunami of selling in markets across all asset classes. By the end of the first quarter, markets had declined as the number of cases and fatalities worldwide continued to rise. In Q2, after the virus took a significant toll on Europe and the East Coast of the US in Q1, businesses began to reopen. At the end of Q3, a second wave of cases began to hit Europe, and fears that it would spread to the Us weighed on markets in September. The United States has the highest number of cases and led the world in the death toll, with Brazil second as of September 30.

Stocks plunged in the first quarter as the prospects for corporate earnings evaporated. In the second quarter, they come storming back on the upside. The DJIA moved 7.63% higher in Q3, narrowing the loss to 2.65% over the first nine months of 2020. In Q1, the NASDAQ was 14.18% lower, but it rose an incredible 30.63% in Q2. In Q3, it was another 11.02% higher and was 24.46% higher than at the end of last year at the end of September after moving to a new record high. The technology sector survived and thrived during the global pandemic. The VIX index was at 13.78 at the end of 2019. On March 31, 2020, the VIX had exploded to the 53.54 level after trading to the highest level since 2008 at 85.47 on March 18. At the end of Q2, the rise in stocks pushed the VIX to 30.43, 23.11 lower for the second quarter. At the end of Q3, the VIX was at the 26.37 level, 4.06 lower than at the end of Q2. As we head into Q4, the virus continues to create fear and uncertainty over the future. However, the US election on November 3 is the most significant event on the calendar in Q3. The President’s battle with the coronavirus has complicated the campaign and election process.

Commodities are essential goods that feed, clothe, shelter and provide energy for people all over the world. Interest rates have declined to lows, which lowers the cost of carrying inventories. In Q2, the US Treasury borrowed $3 trillion to fund the stimulus, which was far higher than the previous record from June through September 2008 when they borrowed $530 billion. The monetary and fiscal stimulus in the US and worldwide weighs on the value of fiat currencies, which could lead to inflation in the coming years. The risk-off behavior in commodities in 2008 and central bank and government actions to address the crisis twelve years ago led to a booming rally in commodities that took prices to multiyear and, in some cases, all-time highs, in 2011 and 2012. A repeat performance over the coming months and years could have an explosive impact on raw materials markets. We are likely to see additional stimulus and borrowing by the Treasury over the coming weeks after the President and first lady have been stricken with the virus.

Animal proteins were the best-performing sector in Q3 as the meats rose by 28.66%. Precious metals posted a 14.30% gain as silver prices moved over 26% higher for the quarter. Energy prices were just under 9.5% higher, led by natural gas, which posted an over 44% gain. News that Warren Buffett purchased the transmission and pipeline assets from Dominion Energy (NYSE:D) in early July lifted the price which had traded at a twenty-five-year low in late June at the end of Q3. Natural gas moved to a new high for 2020 in Q3 before correcting. Base metals were just under 9% higher, led by zinc, nickel, and copper during the three months. Soft commodities were 7.41% higher with cocoa, coffee, and sugar posting double-digit percentage gains and cotton almost 8% higher. Grains were 3.47% higher after a recovery rally that began in August. All six sectors posted gains in Q3.

Natural gas fell to the lowest level in twenty-five years in June at $1.432 per MMBtu on the back of high levels of inventories. Natural gas tends to make annual lows in the early spring, but 2020 is far from an ordinary year. Natural gas exploded to a high of $2.789 in Q3. Gasoline futures tend to hit lows during winter months and highs in the late spring and early summer. Natural gas tends to move higher on seasonal factors during the winter months. The final quarter of the year is typically weak for commodities, but the election, liquidity and stimulus, and the virus are unprecedented in 2020.

A myriad of complex factors on a macro and microeconomic basis dictate the price direction for the commodities market over the coming three months and beyond. The pandemic continues to be the most significant factor facing markets across all asset classes. That will continue for quite some time, perhaps years, as the economic fallout could be the most significant in history.

The Invesco DB Commodity Tracking ETF (NYSEARCA:DBC) product is one of the most liquid macro commodities products with a substantial weighting towards crude oil and energy commodities.

Winners in Q3

During the period from July through September 2020, all of the commodity sectors posted gains. Thirty products posted gains with twenty double-digit percentage increases. The list of gains are as follows:

Over the nine months of 2020, the following twenty-one commodities posted gains:

Losers in Q3

Only nine commodities posted losses in the third quarter of 2020 as the market continued to experience a rebound from the price carnage in Q1:

While winners outnumbered losers in Q3, the year-to-date performance continued to display losses in 18 of 39 products:

The CFTC has defined digital currencies as commodities. The cryptocurrency asset class that was all the rage in 2017 plunged in 2018. In 2019, the digital currencies made a comeback, but the risk-off conditions weighed on many of the members of the asset class in Q1. In Q2 and Q3, they made a comeback. The market cap of the asset class as a whole moved from $181.094 billion at the end of Q1 2019 to $259.705 billion on June 30, up 43.41% for the three months. In Q3, it reached $344.464 billion, up 32.64% in Q3 and 79.47% higher over the first nine months of 2020. Bitcoin rose 17.53% in Q3 and was 48.57% higher so far in 2020. Ethereum posted a 58.23% gain in Q3 and was 173.51% higher so far this year. Litecoin was 11.24% higher for the period and moved 10.23% higher since the end of 2019. Bitcoin Cash was 2.15% higher in the third quarter and 9.79% higher over the nine months. The number of tokens exploded from 5,688 at the end of Q2 to 7,254 on September 30, a rise of 45.49%. The market cap of the digital currency asset class reached a peak of over $800 billion in late 2017. The rising number of tokens has diluted the asset class over the past two and one-half years. Bitcoin, the leader of the pack, underperformed the market cap in Q3 and so far in 2020.

Issues to look forward to in Q4 2020

Optimism is the most significant factor for people to remember as we head into the final quarter of 2020. Scientists are working furiously on treatments and a vaccine that will remove the dangerous threat of coronavirus infections. However, the world is bracing for a new wave of infections during the flu season in the US and Europe.

The economic costs of the global pandemic will be staggering, which will influence markets over the coming months and years. When it comes to commodities, lower prices so far in 2020 are leading to production declines. As prices reach levels where production falls, inventories are likely to begin to drop as the raw materials are the products that feed, clothe, power, and shelter over 7.685 billion people on our planet. Even after the tragic loss of life from the global pandemic, the population will continue to grow. Economic stagnation is likely to remain in the aftermath of the virus. The stimulus will weigh on the value of fiat currencies and boost government debt levels around the world. The decline in the purchasing power of fiat currencies could eventually cause commodity prices to skyrocket, causing periods of stagflation, an economic condition that is difficult to manage. Many markets made comebacks in Q2 and Q3, which could become a launchpad for the future. If the price action after 2008 repeats, we could see a bull market in the raw materials asset class in the coming months and years.

The US election will take the center of the stage alongside the coronavirus over the coming weeks. During Q4, the contentious exchanges between Democrats and Republicans are likely to rise. Simultaneously, the civil discord in the US will make the election period the most turbulent since 1968. Moreover, if the election is close, no clear winner could stoke market volatility through the rest of this year.

I expect price variance in markets across all asset classes to remain at very high levels throughout Q4 and beyond. Trading rather than investing could provide optimal results. Approach all risk positions with a plan, stick to stops, and take profits when they are on the table. Fundamental and technical indicators may not work as well as in the past, given the dramatic changes in economies and behaviors around the world. Look for commodities and stocks that are likely to continue to attract demand in the current environment. Be cautious when taking positions home overnight or over weekends. Follow the trends in markets and try to ignore the news cycle. If we learned anything in 2020, markets often divorce from new items, and trends are a better indicator of market direction than reactions to the daily ups and downs of the news cycle.

Most importantly, stay safe and take care of the vulnerable. Believe in science, as it will eventually come up with the solution. As we head into Q4, the number of cases is rising again, but the mortality rate is declining as healthcare professionals have learned a lot over the past months. Remain cautious; optimism will help us all get through the most challenging period for the world of our lifetimes.

History – Results from my best bets for Q3

The results of my best bets for Q3 from my Q2-2020 report for subscribers to the Hecht Commodity Report are as follows:

  • At the end of the second quarter, the trend in the stock market was higher. The many issues facing markets could cause significant risk-off conditions to return in the blink of an eye. Look to buy high-quality companies during periods of price weakness. The VIX could experience periods where it suddenly moves higher. Buying VIX-related products with tight stops is likely to continue to be the optimal approach to trading the volatility index.

The stock market exploded higher in Q3 with gains in all of the leading indices. The trend was investors’ best friend over the past three months as stocks moved to record highs. The VIX fell but moved higher in September as the stock market hit a speedbump after reaching all-time highs.

  • The trend in the US dollar was lower at the end of Q2. The narrowing of the yield differential between the dollar and the euro could keep pressure on the index into Q3.

The dollar index fell to a new and lower at 91.75 in Q3 but bounced in September on flight to quality buying. The dollar index was 3.52% lower in Q3.

  • The declining confidence in central banks and governments worldwide is likely to provide support for Bitcoin and other digital currencies. I suggest buying on dips and holding long core positions in Bitcoin, Ethereum, EOS, Litecoin, and other members of the burgeoning asset class.

Bitcoin moved over 17.5% higher in Q3, and the asset class’s market cap was over 32.6% higher. Most of the digital currencies have moved higher in 2020.

  • Brazil is suffering from the second-leading number of coronavirus cases and fatalities. However, Brazil has vast natural resources that could lift the value of the currency in the coming months and years if commodity prices move to the upside. I view the real as a proxy for commodities and am bullish for the coming years. I would only buy the Brazilian currency during periods of weakness against the US dollar.

The Brazilian real hardly moved in Q3 as it was at $0.18315 on June 30 and at $0.17805 on September 30. The currency edged marginally lower against the dollar as Brazil suffered from the virus.

  • The Canadian and Australian dollars are also commodities currencies. I favor the upside in the two foreign exchange instruments against the dollar but would only buy during dips.

The Canadian dollar moved 2.05% to the upside in Q3, and the Australian dollar was 3.81% higher over the past three months. Gains in commodities supported the two currencies against the US dollar.

  • I remain bullish on the gold market. The next target on the upside is the 2011 high at $1920.70 per ounce. The risk of a long position will rise with the price of the yellow metal. Buying during corrections is likely to continue to yield optimal results.

Gold rose to a new record high of $2,063 per ounce on the continuous COMEX futures contract in early August before correcting. Gold was over 4.83% higher in Q3.

  • Silver can be a wild ride when it comes to price volatility. I favor the long side in the silver market. The first target on the upside is the 2016 high at just over $21 per ounce. Above there, silver could run much higher in the coming months and years.

Silver blew through its technical resistance level as a hot knife goes through butter, rising to a high of $29.915 per ounce in early August before pulling back to below the $23.50 level at the end of Q3. Silver gained over 26% in Q3.

  • Platinum has been a dog, but I remain a canine lover. I would buy platinum on price dips using either the futures, physical, or ETF markets.

Platinum rose by around 7% in Q3, but the metal’s performance continues to be disappointing compared to the other precious metals.

  • Copper enters Q3 in a firmly bullish trend. $3 is the target on the upside. If the price action following the 2008 global financial crisis is a guide, copper could pick up upside steam if inflationary pressures emerge.

Copper moved above $3 per pound in Q3 and reached a high of $3.12010 before pulling back to just below the $3 level. Copper gained 11.76% on COMEX in Q3.

  • I continue to favor the shares of BHP, RIO, OTCPK:GLNCY, FCX, SCCO, VALE, and the base metals producers. Approach these companies with a plan for risk-reward. The PICK ETF product holds a portfolio of shares in the leading base metal producing companies.

All of the stocks posted impressive gains in Q3. The PICK ETF moved from $24.53 at the end of Q2 to $26.78 on September 30, a gain of 9.2% after pulling back from a high of $29.13 on September 16.

  • Grain markets feed the world. We are coming to the end of the growing season in the US, and the 2020 crop looks to be sufficient to meet global requirements. From a fundamental basis, I continue to favor the long side of the grain markets, but trade issues and high inventory levels could cap the upside in the corn, soybean, and wheat markets. I would look to take profits on long positions on any rallies over the coming weeks.

I took profits on grain positions in August on a scale-up basis. The August 10 derecho caused some crop damage, and the decline in the US dollar provided support for the prices of soybeans, corn, and wheat futures, which all posted double-digit percentage gains in Q3.

  • The KCBT-CBOT wheat spread continues to be at a divergent level with a significant premium for CBOT wheat futures. I favor an eventual mean revision in the spread as the long-term average is a 20-30 cents premium for CBOT over KCBT wheat. I would hold existing positions at over the 50 cents premium for the KCBT wheat level.

The KCBT-CBOT wheat spread continued to disappoint, moving from a 54.50 discount for KCBT hard red winter wheat over CBOT soft red winter wheat on June 30 to a 68.25 cents discount at the end of Q3. The widening of the spread is another sign that wheat consumers are not hedging their requirements.

  • Crude oil is likely to remain volatile over the coming months. I favor the upside but would only take risk positions with tight stops. I also favor the best-in-breed like Exxon Mobile (NYSE:XOM), British Petroleum (NYSE:BP), and Royal Dutch Shell (NYSE:RDS.B) as they could be positioned to pick up assets at bargain-basement prices as the industry consolidates. When it comes to the prices of oil and gas, I will trade from the long and short sides of the market with tight stops on all risk positions favoring long exposure.

Crude oil edged higher, but the market was stable around the $40 pivot point. XOM moved from $44.72 at the end of Q2 to $34.33 at the end of Q3 as it was dropped by the DJIA. BP fell from $23.32 to $17.46 over the quarter, and RDS.B declined from $30.45 to $24.22.

  • The gasoline and heating oil crack spreads remain at low levels. I favor leading refining companies like Valero (NYSE:VLO). I would look to buy crack spreads on price weakness.

The gasoline crack spread move 15.80% lower in Q3, and the distillate crack fell 21.95%. VLO’s performance was poor as the stock fell from $58.82 to $43.32.

  • Natural gas remains cheap at below $2 per MMBtu. I am looking for a recovery that tests the early May high at $2.162 per MMBtu. As the 2020/2021 winter season approaches in the fall, the high level of inventories should cap any rallies. However, we should see the price drift higher as the withdrawal season approaches. I believe we have seen the low for 2020 at $1.432 per MMBtu.

Natural gas exploded to a high of $2.789 in late Q3. The energy commodity turned higher after Berkshire Hathaway (NYSE:BRK.A) announced the purchase of the transmission and pipeline assets from Dominion Energy (D) in early July. Natural gas never challenged the late June low in Q3.

  • Coffee is in the buy zone at $1 per pound or lower. Sugar is likely to follow the Brazilian real and oil price over the coming quarter. Cocoa is in the buy zone below the $2,200 per ton level, but a tight stop on long positions is a wise approach. Cotton at 61 cents recovered, and the path of the price will depend on this year’s crop and trade between the US and China. I continue to favor the upside but would use a very tight stop on long positions. Cotton inventories are high, which could cap the upside over the coming months.

Coffee was 10.4% higher, sugar rallied by 12.96%, and cocoa was up 16.47% to lead the sector in Q3. Cotton posted a 1.89% gain for the quarter. All of the soft commodities posted gains except for FCOJ.

  • Cattle and hog prices are at the lowest level in years. I am bullish for the long term, but the 2020 grilling season will end in early September. I would look to buy beef and pork futures on price weakness but would use stops and re-enter at lower levels if the market triggers stops on the downside.

Animal proteins were the best performing sector as prices made significant comebacks from low levels at the end of Q2. Live cattle futures were over 18.4% higher, feeder cattle appreciated by 6.40%. Lean hogs exploded over 61% higher, making the pork futures market the best-performing commodity in Q3.

  • Lumber has moved a lot higher over the past three months. The price of wood will reflect the US housing market and the potential for an infrastructure program in the US. The price of lumber moved to the upside by 50% in Q2. The risk of long positions rises with the price of lumber.

Lumber kept on going on the upside until the price hit an incredible high of $1,000 per 1,000 board feet. Demand for home improvements and new construction increased demand while slowdowns and shutdowns at mills limited supplies. The price rose above the previous record high of $659 and reached $1,000 before pulling back to below the $600 level at the end of Q3.

  • The Fed has installed a giant put option under US bonds and debt securities. I would be a buyer of bonds on any price weakness and a seller during risk-off periods that cause the prices to rally.

US Treasury yields remained at low levels, but expectations for higher inflation caused some selling in the bond market. Buying on price weakness was the optimal approach to the bond market in Q3.

  • Expect the unexpected in Q3. Follow trends and ignore the news cycle. The market will tell you the correct risk position. Approach markets with a plan for risk and reward and stick to that plan. Never risk more than your profit horizon. When you get aboard a profitable trend, use trailing stops to optimize profits. Markets are entering Q3 with optimism, but it is likely to be a bumpy road over the second half of 2020.

The commodities asset class posted a 12.04% gain in Q3, erasing most of the loss for 2020. At the end of September, the asset class was down only 1.08% after the price carnage in March and April. Trading from the long side of the market with tight stops and taking profits on rallies yielded profits in Q3.

Many assets made a comeback in Q2 and Q3, and commodities were no exception as the asset class posted a double-digit percentage gain for both quarters. In Q4, the election and the pandemic are the two leading issues. While the polls are pointing to a victory by Democrats, polls were wrong in 2016. 2020 is no ordinary year, and the final quarter could bring more than a few surprises. The first of which was President Trump’s battle with the coronavirus.

The Invesco DB Commodity Tracking ETF product holds a diversified basket of raw material futures, but it is weighted towards energy products. The fund summary for DBC states:

The investment seeks to track changes, whether positive or negative, in the level of the DBIQ Optimum Yield Diversified Commodity Index Excess Return™. The fund pursues its investment objective by investing in a portfolio of exchange-traded futures on Light Sweet Crude Oil (WTI), Heating Oil, RBOB Gasoline, Natural Gas, Brent Crude, Gold, Silver, Aluminum, Zinc, Copper Grade A, Corn, Wheat, Soybeans, and Sugar. The index is composed of notional amounts of each of these commodities.

The most recent top holdings of DBC include:

Source: Yahoo Finance

DBC has $851.27 million in net assets, which was steady from the end of Q2. The product trades an average of 1,144,657 shares each day, which edged higher than at the end of Q2.

Source: Barchart

As the chart shows, DBC moved from $12.31 at the end of Q2 to $13.05 per share at the end of Q3, a rise of 6.00% for the quarter. DBC underperformed the asset class in Q3 as the composite of 29 commodities rose by 12.04% as it is weighted towards energy and oil prices.

Expect a continuation of volatility in markets in Q4 as the world continues to battle coronavirus and faces the Us election. Discipline, a logical risk-reward approach using stops, and flexibility are critical elements for success in the world of commodities. Stay safe and healthy.

Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.

The Hecht Commodity Report is one of the most comprehensive commodities reports available today from the #2 ranked author in both commodities and precious metals. My weekly report covers the market movements of 20 different commodities and provides bullish, bearish and neutral calls; directional trading recommendations, and actionable ideas for traders. I just reworked the report to make it very actionable!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.

The author is long physical precious metals.

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