One of Warren Buffett’s most famous quotes, reflecting the heart of his investment philosophy, is, “Price is what you pay, value is what you get.” As markets move into 2025, stocks, cryptocurrencies, gold, coffee futures, orange juice futures, and cocoa futures are at or near all-time highs. Meanwhile, grain and oilseed futures, lithium, and other markets are near the bottom end of trading ranges.
While price trends are always our best friends, identifying value in markets is critical for success. In the world of commodities, price cyclicality reflects the principle that history tends to repeat. Combining a technical and fundamental trading and investing approach can pinpoint market inflection points that lead to significant gains. This week, we will look at markets signaling bottoms or limited downside risk for the coming year.
Commodity cyclicality
- Commodities are global assets, reflecting the worldwide economic and geopolitical landscapes.
- Prices tend to rise to levels where producers increase output, inventories rise, and prices form tops.
- Prices can fall to levels where producers curtail production, inventories decline, and prices form bottoms.
- While technical trends are a trader or investor’s best friend, price cyclicality leads to fundamental deficits or gluts that can reverse trends.
Grains and oilseeds offer significant value
- Grains and oilseeds feed and increasingly power the world.
- Corn, soybean, and wheat futures reached highs in 2022 as the war in Ukraine caused supply fears.
- Russia and Ukraine are leading agricultural commodity-producing countries.
- Prices have declined over the past years as supplies have been ample to meet the worldwide demand.
- Prices have declined to levels that could offer value, as the weather across the critical growing regions will be the primary factor in determining the path of least resistance.
- The CBOT futures and the CORN, SOYB, and WEAT ETF products track corn, soybean, and wheat prices, which could offer significant value in late 2024.
Lithium could be a sleeper
- Lithium is a crucial input in lithium-ion batteries.
- The rising demand for EVs and electronics supports lithium demand.
- Lithium prices have imploded since the 2022 high.
- Prices have declined to levels where commodity cyclicality could form a bottom.
- The iShares Lithium Miners and Producers ETF product (ILIT) owns shares in the leading publicly traded lithium-producing companies.
Platinum group metals offer value
- Gold and silver remain in multi-year bull markets, with gold above $2,600 per ounce and silver over $29 per ounce.
- Platinum and palladium have been trading under their $1,000 per ounce pivot points, with platinum less than one-half the price at the all-time high and palladium under one-third the record peak.
- Platinum and palladium offer value compared to their precious cousins, gold and silver.
- The Aberdeen Physical Platinum Shares ETF (PPLT) and the Granite Shares Platinum Trust ETF (PLTM) are products that track platinum prices as they own physical platinum bullion.
- The Aberdeen Physical Palladium Shares ETF (PALL) is a product that tracks palladium prices as it owns physical palladium bullion.
Risk-reward dynamics are critical for success
- Risk-reward dynamics on long positions improve when commodity prices approach the bottom end of price cycles.
- Any risk positions require stop-loss levels that reflect potential profits.
- Adjusting risk-reward levels when the price moves in the anticipated direction is appropriate.
- Stick to stop loss levels when the price moves contrary to expectations. After stopping out, consider reestablishing a risk position at a more attractive level, as small losses in the quest for oversized profits can be a winning strategy.
Value investors in commodities increase their odds of success by combining trend-following strategies with commodity cyclicality dynamics. At the end of 2024, some of the leading candidates at or heading toward the bottom end of pricing cycles are grains and oilseeds, lithium, and platinum group metals. Make sure that any risk positions have a defined plan and stick to the program.