Timing Is Everything, Especially with a Commodity Index: Two Relatively Simple Indicators, the Price Structure of GSCI Futures and the Fed's Current Monetary Policy, Can Be Very Useful for Profitable Futures Trading

By Till, Hilary; Eagleeye, Joseph | Futures (Cedar Falls, IA), August 2003 | Go to article overview
Save to active project

Timing Is Everything, Especially with a Commodity Index: Two Relatively Simple Indicators, the Price Structure of GSCI Futures and the Fed's Current Monetary Policy, Can Be Very Useful for Profitable Futures Trading


Till, Hilary, Eagleeye, Joseph, Futures (Cedar Falls, IA)


Commodity futures programs are continuing to attract significant capital from investors. According to Goldman Sachs, an estimated $12 billion is invested in or benchmarked to the Goldman Sachs Commodity Index (GSCI).

The GSCI, designed to be a benchmark for commodity investors comparable to the S&P 500 Index for equities, is a world-production-weighted commodity index, incorporating futures contracts that span five commodity sectors (see "Pieces of the pie," right). Like the S&P 500 Index, a GSCI futures contract trades on the Chicago Mercantile Exchange. With only one futures contract investors are able to gain exposure to a basket of diversified, commodity futures contracts.

HITTING THE CURVES

A previous article ("Trading Scarcity," October 2000) argued that you should consider using a reliable indicator of scarcity to decide whether to invest in the GSCI. That indicator is the "term structure" of the GSCI futures curve.

Term structure means you should examine the relative price differences of GSCI contracts across delivery months. When a near-month contract is trading at a premium to more distant contracts, a commodity futures curve is said to be "in backwardation." Correspondingly, when a near-month contract is trading at a discount to more distant contracts, the curve is "in contango."

When the GSCI is trading in backwardation, you should consider investing in the GSCI: Scarcity is indicated when investors are willing to pay a premium for immediately deliverable commodity futures contracts. When the GSCI is trading in contango, you should consider reducing your investment in commodities: Scarcity is not indicated.

Using this key market relationship, the premise is that you might be able to improve the timing of long-term positions in the futures markets.

PROFITABLE PAYOFF

"Timing pays off" (right). reviews the results of investing in the GSCI from mid-1992 through June 2000 using three different policies:

[GRAPHICS OMITTED]

1. Invest in the GSCI throughout the entire period.

2. Invest only when the GSCI curve is in backwardation.

3. Invest only when the GSCI curve is in contango.

At the end of the investment horizon, the passive investment made 3.8%, while the backwardation investment conditional gained 39.1%, and the contango investment conditional lost 25.3%, as reported in the previous article. (These results exclude the returns from interest income on collateral.)

This strongly suggests that the GSCI's curve shape is a useful timing indicator.

But how has this indicator performed since the original study in the summer of 2000? Rather well, it turns out (see "Updating the value of timing" right). From the summer of 2000 through March 2003, the passive investment made 3.7%, while the backwardation investment conditional gained 8.1%, and the contango investment conditional lost 4.1%.

[GRAPHICS OMITTED]

The usefulness of examining the curve shape for an investment in the GSCI appears to be confirmed.

MONETARY INFLUENCE

For a different aspect, we'll review findings of an article published in 2000 ("Efficient Use of Commodity Futures in Diversified Portfolios," Journal of Futures Market) that provides a useful, transparent indicator to time an investment in the GSCI.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

Timing Is Everything, Especially with a Commodity Index: Two Relatively Simple Indicators, the Price Structure of GSCI Futures and the Fed's Current Monetary Policy, Can Be Very Useful for Profitable Futures Trading
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?