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Seasonality in commodity markets

London, 9 July 2012

Clear seasonal swings in commodity markets can be even more pronounced than those that occur in stock markets, according to CMC Markets. “While markets around the world tend to be impacted by similar forces, seasonal factors in commodities can vary dramatically from market to market. Because of this, commodities fluctuate at different times of the year.  Distinguishing these trends enables traders to potentially capitalise on the strength of a commodity at a certain point in the year.  Likewise, they might avoid the pitfalls of weaker periods and even take advantage of seasonal declines through shorting.”

While equity seasonality is driven by flows of investment capital, seasonality in commodity markets is driven by changes in the production and consumption of the underlying commodity throughout the year.

Energy: In the northern hemisphere, peak demand for natural gas occurs in winter when demand is high for home heating, with a smaller spike in the summer when natural gas is used in power generation to meet air conditioning demand. Gasoline, meanwhile, has its peak demand period in the summer when consumers drive to cottages and other vacation destinations.

Precious metals: Although gold has been generally strong throughout the year in the bull market of the last decade, the strongest performance is usually in the autumn, driven by increased jewellery demand for wedding season in India.

Grains: Seasonality is driven more by the supply side. Weather conditions which impact both the quantity and quality of harvests.

Average Monthly Return 1987-present

Month

Gold

Silver

Copper

US Crude

Gasoline

Natural

Gas

Wheat

Corn

January

0.12%

2.52%

1.08%

0.07%

2.19%

(4.43%)

(0.43%)

0.77%

February

0.28%

2.18%

2.41%

1.06%

6.43%

(1.36%)

(1.17%)

1.74%

March

(0.15%)

2.79%

2.39%

4.72%

13.99%

4.02%

(1.57%)

2.44%

April

1.04%

1.21%

1.79%

2.26%

7.02%

1.69%

0.20%

(0.08%)

May

0.11%

(0.53%)

(1.48%)

0.43%

0.99%

3.38%

0.44%

1.72%

June

(0.06%)

(2.43%)

0.49%

1.03%

1.01%

(0.67%)

(2.42%)

(2.07%)

July

0.09%

3.21%

3.53%

2.14%

(1.52%)

(2.42%)

3.89%

(3.56%)

August

0.68%

(2.54%)

(0.29%)

1.23%

(7.29%)

0.10%

3.33%

0.46%

September

1.72%

2.36%

(2.26%)

2.96%

(8.17%)

13.40%

2.60%

0.34%

October

(0.01%)

(1.83%)

(1.16%)

(2.41%)

(3.36%)

11.21%

(0.41%)

2.10%

November

2.15%

2.02%

1.56%

(2.61%)

(0.27%)

(2.95%)

(0.14%)

(0.65%)

December

0.69%

1.42%

(0.66%)

0.18%

3.02%

(3.25%)

3.35%

5.80%

 

Based on the average monthly performance, CMC Markets tested the performance of a number of active strategies that go long and short at different times of the year against passive a traditional buy and gold strategy.

CMC Markets developed the following conclusions:

Switching positions: While it has traditionally been believed that returns and risk move together, performance testing shows that trading actively and switching sides throughout the year tends to increase returns and/or reduce risk in commodity markets.

Returns: Dividing profits by the standard deviation provides a simple return per unit of risk measure that can be used to compare the various strategies. Active strategies are most powerful in gasoline and natural gas and generate a strong increase in return relative to risk.

The Gold effect: The one exception is gold where the active strategy reduced risk slightly but also lowered returns. This highlights the strength of the bull market over the last decade, but also indicates that gold pricing is influenced by many factors besides seasonality in commodity demand, particularly its role as a currency, store of value and defensive haven.

Looking at how seasonal swings in commodities will play out in rest of 2012, Colin Cieszynski concluded: “After a rough finish to 2012 that saw major declines in three of the last four months of the year, commodities tried to rebound to start the year. Declines have resumed over the last three months, driven by continued weakness in precious metals. Meanwhile, fears that financial turmoil in Europe and slowing economies in China and the US have knocked energy and base metals for a loop.

“Although oversold conditions have developed lately in many commodity markets, rebound attempts so far have been short-lived due to the current economic and broad market uncertainty that has cut across many asset classes. Depending on events, it is possible that we could see a summer rebound but trading is likely to remain choppy through the end of June.”

Ends --


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