In this instalment of The Macro Investor, I’m going to lay the foundations for a long position in cocoa. A solitary undertaking, sound investment comes from developing an alternative, contrarian, view and opposing the crowd when sentiment is extreme. When everybody is pessimistic about the prospects for a market, we hit ground zero. From that point on there’s relatively little that can bring about a more bearish attitude; but the slightest sniff of a change in sentiment is enough to set prices racing higher.
Opportunities arise when the market consensus is strong; when everybody agrees on some particular outcome; or when sentiment is too high or too low. The cocoa market is a particular case in point right now. The commodity has been on a bitter downtrend that has dragged down its price to ten-year lows, and sentiment is extremely poor.
Good weather, sluggish demand growth, improved crop yields, high historical prices, a declining pound, and massive speculative short positions taken by hedge funds have all contributed to an accelerated price decline. But, while these factors have colluded to force prices into a bearish trend, they have also laid the foundations for a nascent bull market, as they have helped supply to adjust quickly to market conditions. It is on these grounds that I believe there is a strong case in favour of a long position in cocoa….
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