Q1 Is Typically Very Strong For Precious Metals

|
Includes: BALB, BLNG, BNO, BOIL, CANE, CEF, CHOC, CORN, DBO, DBP, DCNG, DGAZ, DLBL, DLBS, DNO, DRR, DTO, DWT, EDV, ERO, EUFX, EUO, FXE, FXY, GAZ, GAZB, GLD, GLTR, GTU, IAU, JJCTF, JJP, JO, KOLD, NIB, OIL, OILK, OILX, OLEM, OLO, OUNZ, PALL, PHYS, PPLT, QGLDX, SCO, SGAR, SGG, SGOL, SLV, SOYB, SPPP, SPTL, SPY, SZO, TBF, TBT, TLH, TLT, TMF, TMV, TTT, TYBS, UBT, UCO, UGA, UGAZ, UHN, ULE, UNG, UNL, URR, USL, USO, USOI, UWT, VGLT, VUSTX, WEAT, WEET, WTID, WTIU, ZROZ
by: Movement Capital

Summary

Energy: Heating oil is in backwardation, Henry Hub natural gas is down 40% YTD, and WTI crude seasonality is typically positive in Q1.

Financials: 12-month momentum is positive in the 30-year Treasury bond, January has historically been weak in EUR/USD, and the S&P has outpaced all of its seasonal averages in 2017.

Grains: Rice futures are in backwardation, and wheat is ~30% off the summer highs.

Metals: Palladium is up 50% in 2017, 12-month momentum is positive in gold, and precious metals are typically strong in Q1.

Softs: Cocoa retraced its recent bounce, lumber is in backwardation, and March has historically been a weak month for sugar futures.

This is my 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 outlet for weekly recap articles. I break down the updates by asset class, so let's get started.

Energy

Heating oil (UHN) is one of the few commodity contracts in backwardation. This happens when contracts further out in time are actually priced lower than contracts closer to expiration. Backwardation benefits traders with long exposure while contango detracts from returns. Most people are familiar with the concept of contango in VIX futures, where VIX futures further out in time are typically priced higher than the front-month contract.

Natural gas (UNG) is aggressively selling off into year-end.

Here's 20-year average monthly performance data for a position in WTI crude oil (USO) that constantly rolls into the contract with the highest open interest.

WTI crude has made a complete roundtrip this year, and in fact 2017 performance was basically the opposite of historical seasonality.

Financials

12-month momentum is now positive in the 30-year Treasury bond (TLT), implying that long-term trend followers are now biased to the long side.

January has historically been the worst month of the year for EUR/USD (FXE).

JPY/USD (FXY) seasonality is typically weak in the first quarter.

The S&P 500 (SPY) has ripped this year and is above all 5-, 10-, and 20-year seasonal averages.

Grains

Rice futures are now trading in backwardation.

February has been a strong month for soybean oil futures since 1997.

Wheat (WEAT) futures are ~30% off the 2017 highs. All pictured seasonal averages for wheat trend down over time because the wheat market typically exhibits a substantial amount of contango, forcing longs to constantly roll up to higher priced contracts.

Metals

January through April has historically been a very strong period for copper (JJC) futures.

12-month momentum in gold (GLD) is positive.

Palladium (PALL) is up 50% this year, by far the best performing precious metal.

Similar to copper, Q1 has historically been a positive period for silver (SLV).

Soft Commodities

Cocoa (NIB) retraced its recent bounce and looks like it will close 2017 near the lows.

Contango has slightly decreased in coffee (JO) futures.

Lumber is still in substantial backwardation.

Since 1997, March has been the worst month of the year for sugar (SGG) futures.

Conclusion

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

First, let's look at the 20-year average monthly performance numbers for the month of January. The best-performing contracts have historically been platinum (PPLT), silver, and palladium. The worst performers have been rice, EUR/USD, and natural gas.

Here's a snapshot of the current amount of contango or backwardation for each contract. I compare the contract with the highest open interest to the contract with the third-highest open interest. Lumber, cotton (BAL), and WTI crude are in highest amount of backwardation. Corn (CORN), RBOB, and wheat are in a heavy amount of contango.

And these are the 12-month roll-adjusted momentum numbers for each contract. Palladium has been the #1 performer (among the contracts shown) over the last 12 months.

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.

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: This article should not be construed by any consumer as personalized investment advice over the internet. This article does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked in this article or incorporated herein. This article and information are provided for guidance and information purposes only. Investments involve risk are not guaranteed. All information provided in this article should not be reproduced, copied, redistributed, transferred, or sold without the prior written consent of the author.