Coming off a -1.16% loss in February, Armajaro Commodities Fund, with nearly $715 million under management, notes the dichotomy of commodity market bullishness in the face of economic weakness.

Commodity fund

In face of weak economic data, commodity prices rose

In an investor letter reviewed by ValueWalk, Armajaro put the issue in perspective by noting the forward looking nature of the commodity markets as a potential driver of price:  “Weaker data out of the US, principally another disappointing payrolls report, reflects the slowdown in growth since the start of the year,” the report said, stating the fact. “However, the recent US data slump is most likely transitory; the result of prolonged periods of severe winter weather which has biased data negatively,” the report said, noting the bull case for commodities. “Compounding fears in the emerging world was a weaker Chinese PMI falling to the lowest level since June 2013, amid recent stories of credit contraction and potential investment trust defaults.”

Commodity: Copper an indicator of economic strength

When considering commodities as an indicator of economic strength or weakness, copper, an industrial metal, is typically involved in such considerations.  Noting a weaker dollar and potential short covering, Armajaro said this supported the copper market despite macroeconomic indicators. The fund is looking for rising copper prices, noting that “fundamentals remain supportive with Chinese refined imports continuing to surprise to the upside alongside declining exchange inventories and a persistent backwardation in nearby spreads,” the letter said, but also hedged their opinion. “However, prices have come under renewed pressure from reports China may start tightening lending to the property industry, together with a weaker PMI, points to an uncertain demand environment.”

Commodity: Oil and Gold

The investor letter noted that supply growth from Libya and Iraq has not materialized and along with supply disruptions, some of which are due to sabotage, the fund thinks “this should pressure the record speculative length in the market.”

The letter, published in February, didn’t position the fund as a raging bull on gold:  “Gold prices continued to grind higher in February buttressed by a weaker US dollar alongside being increasingly viewed as a tail risk hedge,” the letter said. “The positive shift in sentiment from aggressively bearish levels seen at the start of the year has had a sizeable impact on prices given the very light positioning in the market,” but again the letter hedged. “However, the substantial increase in speculative length in a relatively short span of time raises the potential for near term liquidation should geopolitical tensions subside.”  The price of gold ended February near $1,320 and has risen to near $1,365 as of the middle of the month.