By Jeffrey Christian
John Wiley and Sons
$27.95, 250 pages
Reviewed by Nelson Freeburg
Christian warns that commodity markets swirl in a haze of conflicting crosscurrents, misinformation and even deception. He is skeptical of efforts to apply simple, mechanical formulas to a staggeringly complex field of inquiry. For example, any attempt to trade precious metals based on an equilibrium gold/silver ratio is doomed to failure. Above all, Christian stresses that commodities do not necessarily trend together. He pours scorn on advocates of deterministic “supercycles” where diverse commodities supposedly move in synchronized waves.
Christian stresses that to succeed in commodity investing, you have to bring expert, penetrating insight into the concealed dynamics of the marketplace. For example, his research shows China’s active export market in silver comes from huge stores of recycled scraps and not from the Central Bank. He concludes, bulls expecting a reduction of inventory to push the market higher may be disappointed.
Apart from key themes, Christian adds some observations based on his decades of experience. He warns that there is no predictable link between commodity prices and economic growth and inflation. And, as you might expect, he sees commodities as a desirable asset class to complement traditional investments.
As for Christian’s personal trading, he strongly favors fundamental over technical analysis. While he uses technicals to fine-tune trade execution, his assessment of supply and demand sets up the core position. That leads to another interesting observation. Christian says that 25 years ago most commodity funds used fundamentals exclusively. Fewer than 10% of fund trades were based on technical patterns. Today he estimates technicals account for more than 95% of fund transactions. Despite the shift, this consummate industry professional is not apt to change his winning ways.
Nelson Freeburg is editor of Formula Research, a financial letter that builds and tests quantitative timing models for stocks, bonds, and commodities. Formula Research serves traders and money managers in 27 countries.