Is The Precious Metals Rally Over? This Seasonality Data Says Yes

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Includes: CORN, FXE, FXY, GLD, JJC, JO, NIB, PPLT, SGG, SPY, TLT, UGA, UHN, UNG, USO
by: Movement Capital

Summary

Energies: The WTI futures term structure barely budged last week. Both heating oil and WTI have historically done very well in March/April.

Financials: Both the 30-year bond and JPY/USD typically rally during the summer months as the S&P is historically weak. EUR/USD 12-month momentum is negative.

Grains: Soybean oil is the worst performing agricultural commodity YTD and oats are in backwardation.

Metals: The seasonal outlook for gold and platinum is mixed, both typically do well in January and February and then muddle through the summer. Copper is typically strong until April.

Softs: Cocoa is the worst performing commodity over the past twelve months, coffee has retraced its spike, and sugar has had a horrible March like usual.

This is my fourth weekly update that outlines seasonal trends and the term structure of futures contracts. All of the below data and graphs come from my Commodity Seasonality website. The website is completely free and I use Seeking Alpha as my sole source for weekly recap articles. I break down the updates by asset class, so let's get started.

Energies

We're coming up on the best month of the year for heating oil (NYSEARCA:UHN).

While natural gas (NYSEARCA:UNG) is off the lows, it's still down ~20% YTD and far below any seasonal averages.

The term structure in WTI crude oil (NYSEARCA:USO) barely shifted during the recent correction. The curve is basically flat, exhibiting just a slight amount of contango over the next few months.

Like heating oil, WTI crude oil has historically averaged a very positive April over the past twenty years.

Financials

30-year bond (NYSEARCA:TLT) futures are typically strong from June to September. This coincides with the summer volatility that sometimes drags down the stock market.

EUR/USD (NYSEARCA:FXE) is down over the past twelve months. Negative annual momentum has historically been a poor sign.

JPY/USD (NYSEARCA:FXY) typically bottoms in April and then stays steady until the end of October. The Japanese yen is thought of as a safe haven currency, so this seasonality lines up with the previously mentioned 30-year bond strength and equity market weakness in the summer.

Over the past twenty years, April has produced the highest average monthly performance in the S&P (NYSEARCA:SPY).

Grains

There are honestly very few seasonal trends in corn (NYSEARCA:CORN) futures.

The oats market is one of the few commodities in backwardation, where contracts for delivery further out in the future are actually less expensive than nearer term contracts. Oats also currently exhibit positive momentum.

Soybean oil is the worst performing agricultural commodity year-to-date. The bulls shouldn't be comforted by the below chart of seasonality, because soybean oil is typically weak from April until October.

Metals

Copper (NYSEARCA:JJC), along with other industrial commodities, has had a strong start to the year. Historically, copper has a bid until late April and then moves sideways.

Gold (NYSEARCA:GLD) has stuck to its historical seasonality this year, outperforming in January and February.

Platinum (NYSEARCA:PPLT) seasonality is similar to gold.

Soft Commodities

Cocoa (NYSEARCA:NIB) is down ~35% over the past twelve months, the worst annual performance for the soft commodity over the past ten years.

Coffee (NYSEARCA:JO) has completely retraced its ~12% spike earlier this year.

Orange juice futures, like oats, are also in backwardation and are up over the past year. Backwardation has actually increased in OJ over the past few weeks. This is beneficial for longs, as futures tend to "roll up" to the higher spot value. This is typically referred to as a positive roll yield, meaning there's a positive expected value to holding a long position in a backwardated futures contract. Most of the time commodities are in contango, the opposite scenario.

March has been a horrible month for sugar (NYSEARCA:SGG) futures. From a seasonal perspective this isn't surprising, March has by far been the worst month of the year over two decades.

Conclusion

That wraps up the coverage of individual contracts. I'll close with my most important charts.

First, here are the average 20-year monthly performance numbers for April. The best performing contracts have been RBOB gasoline (NYSEARCA:UGA) and the S&P 500. The worst performers have historically been oats and orange juice.

Here's a look at the current amount of contango or backwardation for each contract. As a reminder, I compare the contract with the highest open interest to the contract with the third highest open interest to generate the below numbers. Surprisingly enough, the two contracts with the worst performance in April (oats and orange juice) also currently exhibit the highest degree of backwardation. Wheat and natural gas have the most extreme amount of contango.

Finally, here's the roll-adjusted twelve-month momentum for each contract. Natural gas stands out as the strongest contract, while cocoa is the worst performer.

I hope you've found this article to be useful. It's meant to cut down on your research time and save you some money.

Follow me to receive my weekly seasonality updates on Seeking Alpha. Let me know if you have any questions in the comments below.