Fascinating commodity market

In mid-February, I had the honor and pleasure to talk with Ole S. Hansen – Head of Commodity Strategy in Saxo Bank. It was supposed to be a short interview, but, one thing led to another, so many issues related to commodities investments were discussed that it would be impossible to include them all in one article. Thus, in next few days I will publish consecutive excerpts of our conversation. I recommend reading because Ole shared a huge amount of knowledge about the market.

Short question, at the beginning. To break the ice 😉 If you weren’t commodities market expert, what would you do in your life?

Ha! That’s very good question, because I’ve been around for many years. If you asked me when I was younger it might be a different answer than now. But I’m guessing you’re not expecting the answer that I wanted to be a doctor, that you’re asking about finance. Honestly, I think this is exactly where I want to be.

Look at the currency market, how credibly boring it’s becoming. Hardly anything going on. There is so much focus on the few individual crosses but we can’t see any kind of activity and liveliness we experienced in the past. I’m sure it’ll come back but nowadays we’ve not seeing it at all.

Commodities is always a story. It’s a mixture of supply, demand and quite often politics as well. That creates quite exciting environment. Sometimes a confusing one as well, sometimes a frustrating one as well but generally this is a market where something always happens. Where you may not always have the same correlations to others. From that perspective I think we’ve still seen the reason in something like gold that, for change, showed there’s an ability to react adversely against some other market.

On the other hand – stock market. I’ve never been involved in the stock market, so I don’t know enough about how to analyze individual stocks. So it has to be somewhere between journalism and the macro analysis.

So if I was to stay within finance then I would be just where I am.

I asked this question for a reason. I’ve noticed that people who are involved in capital market right now, quite often have some very interesting life histories. I’m a musician and sociologist originally, for example…

Yes, I do remember.

…I know investors who were psychologists, philosophers, doctors and so on…

Well, I’m a farmer boy originally. This is my background. So I’ve always been closely attached to agricultural. But the truth is I started very young so investments and the market it’s been my entire life.

As you mentioned, you’ve been on the market for long time, I would like to ask you few questions about building a portfolio, if you don’t mind. What is the better strategy, in your opinion, looking for and catching opportunities for individual commodities or building some complex portfolio?

It really depends on individual investor’s or trader’s approach to trading. Individual commodities, as we know very well, require almost constant focus and require a lot more discipline. We also know that adding some commodities to traditional investments makes the portfolio less volatile so gives you a little bit more breathing space. On the other hand you should expect lower return rate as well. So it’s primarily depends on the outside investments appetite.

In the hedge fund I’d worked for in London before I moved back to Saxo Bank we were always on the lookout for new markets to trade. This from a statistical consideration which shows how diversification brings down the overall volatility of the portfolio. Something that was required when managing more than $1 billion. (( replace with above… had other problem. We couldn’t get enough products. There was another volatility (I mean, old world volatility) in the markets, so we could trade better, but still,  neither the basket of assets nor the time perspective of the investment was enough for us.) )

That was a multi asset but even with the commodity base we were always looking for new products just like everyone else. It seems money managed lean towards liquidity strong enough to be able to both get in and get out. Getting out is even more important. If there are only producers and consumers trying to fight for right price on the market and there is no one in the middle then the spread would be wide, the liquidity would be poor and the funds would say “I don’t want to touch it”. This means that even if there is a good history behind some commodities, it is not introduced into the portfolio anyway, because if failed to attract enough liquidity be attractive for investors.

Like the palladium last days…

Palladium is right on the edge of liquid contract. It also partially explains why it’s rallying like crazy…

I’m not sure if you are allowed to answer this question in detail, but in the most general terms. If you would build a portfolio, what would you pay the most attention to? What would be the key factor for you when you would choose instruments?

It really depends on size of the portfolio, because my overriding concern has been always the liquidity. I want liquidity, I want ability of trading 24/7 as preferably. I mean 23/5 these days. And secondly, the size of a portfolio determines whether CFDs or futures can be used. If my portfolio has a certain size I would prefer futures, because if you use them, you’ve got the lowest costs, you’ve got the lowest spreads and you’ve got the highest liquidity.