Investors have piled into commodities, sending their prices soaring, but the good times may be more or less over for now.
Fund managers’ portfolios are the most weighted toward commodities since at least 2006, the starting point of a series of surveys conducted by
Bank of America
The latest results, disclosed this week, show a net 38% of investors surveyed are overweight commodities. The second-highest was a tick above 30% earlier this year.
Invesco DB Commodity Index Tracking Fund
(ticker: DBC) has risen about 35% this year. Now at just over $28 a share, the fund is trading at about 29% above its 200-day moving average. That means it is far above its long-term trend, suggesting its price must soon come back down to earth.
One of the key factors behind the gain has been limits on supply resulting from Russia’s invasion of Ukraine. The U.S. has already banned imports of Russian oil and markets are reflecting a possibility of further restrictions on the sale of Russian commodities, including industrial metals like copper. The fighting in Ukraine, a big wheat producer, has sent prices soaring.
Now, the commodities trade looks crowded. In simpler terms, investors already own a boatload of commodities and aren’t likely to buy more in the short term.
About 34% of fund managers that Bank of America surveyed said oil and other commodities have become the most crowded trade. That’s a higher percentage than for any other response, which included tech stocks, Bitcoin, and other assets.
That means commodities could be due for a pullback in the near term. In moments when the commodity fund’s price is as far above its 200-day moving average as it is now, it averages a 15% decline over the following three months, according to Dow Jones market data going back to 2006. For the following six months, it averages a 41% drop.
“We do see them [commodities] as stretched in the short term,” said Tom Essaye, founder of Sevens Report Research.
None of this means commodities can’t gain in the longer term. They can, but they will probably cool down for a little while first.
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