Market Anomalies: How Funds and Algorithms Push Assets Like Coffee and Gold to ATH Levels

The two assets are trading with a 96% positive correlation, but if we exclude an unusual anomaly and let the markets settle, we may see buying pressure start to weaken.

A strange correlation has also been observed between live cattle, crude oil, and corn. These three futures contracts moved in perfect synchronization, as if they share the same supply and demand chart. It is assumed that this is a market anomaly caused by funds or algorithmic buying aimed at hedging against inflation. Since then, this correlation has started to break down — crude oil was the first to show a breakout, followed by live cattle, and it is likely that corn will follow soon.

Although there were valid reasons for bullish sentiment towards these three assets, unnaturally high correlations usually signal that price movements are driven by momentum rather than fundamental factors. Such moves are often unsustainable when purchasing power runs out, and markets must rely on their own dynamics.

Now, we are seeing a similar strange connection between coffee and gold. If there is a logical explanation for why these two commodities are trading with a 96% positive correlation, we’d love to hear it. To us, it simply doesn’t pass the “smell test.” We suspect both markets are at or near unsustainable price levels, fueled by purchases driven by narratives rather than real economic foundations. Of course, even if we are correct in this assessment, it doesn’t mean that buying will stop immediately — it could take weeks or longer.

Funds and Speculators Are Aggressively Long on Coffee and Gold
Markets can exceed reality in a world of electronic trading and government-subsidized liquidity. For years, we’ve observed excess money moving through the economy, leftover from pandemic-era stimulus. Combined with lavish government spending, this has pushed asset prices, often with questionable value, to astronomical levels (“junk” cryptocurrencies, meme stocks, and NFTs).

Coffee and gold are not in the same category as these assets, but speculative euphoria has helped them as well. We often hear complaints that speculators distort futures markets to unreasonable levels. In the short term, this argument is completely valid, but in the long term, it all comes down to mathematics. Ultimately, the price discovery process overcomes chaos and restores rationality.

According to the Commitments of Traders report, there are currently more large speculators and funds holding long positions in coffee than ever before. Looking back over the past 20 years, this contrarian indicator has had a 100% success rate.

The gold market is also experiencing relentless bullish enthusiasm and aggressive buying. For some time, we have been asserting that this gold market resembles the metals market of 2011. The latest high in gold somewhat disrupts these similarities, but we believe the final outcome will be similar.

Unlike coffee, which typically reverses its bullish trends near the peaks of speculative buying, gold prices tend to soften only after speculators and funds begin unloading their positions. However, when these investor groups become excessively long on the market, the upward move has usually already realized most of its potential.

Charts Speak Volumes:
A picture is worth a thousand words, so let’s turn to the charts to see where these commodities have been and speculate on what might happen next.

Coffee Monthly Chart
Coffee futures haven’t just taken on a parabolic form — they are practically vertical. The Relative Strength Index (RSI) on the monthly chart is approaching 85, which is an all-time high for this indicator in this specific market. Furthermore, such an extreme reading on a monthly chart has only been seen during the most absurd bull runs. In other words, this is an extremely rare occurrence, and in commodities, similar movements have always proven unsustainable.

However, even if this assessment turns out to be accurate, emotional markets know no bounds.

Gold Monthly Chart
It took some time, but investors have finally accepted the idea that Bitcoin and gold can rise together. It is no longer considered that one replaces the other.

While it is difficult for me to understand how the market has determined the value of BTC (not the technology itself, which clearly has value, but specifically this coin), I must admit that the electronic liquidity of an intangible asset is a real advantage. Few realize how difficult it is to actually sell physical gold. I have spoken with people who, for decades, have been buying gold coins or bars, only to find that cashing them out is expensive, inconvenient, and even results in losses.

The RSI on the gold monthly chart is nearing 80, indicating an overheated market. On its own, this is not enough to reverse prices, but the fact that speculators have likely already bought everything they can and will buy, combined with the attractiveness of government bonds with yield, should start to act against the metal.

Conclusion:
It is no secret that electronic and algorithmic trading has changed the market landscape. Markets move faster and more sharply with less news, which can be explained by the unprecedented rise in money supply.

However, macroeconomic market cycles continue to operate, despite the growing volatility. While this remains the case, high commodity prices will eventually correct themselves, and high interest rates will ultimately pressure gold.