Sinking Commodities: Is More Downside Ahead?
By Ron DeLegge, Editor
June 10, 2010
SAN DIEGO (ETFguide.com) – Over the past several years commodity permabulls like Jim Rogers have advocated commodities for everyone all the time. And through many peaks and through many valleys, the all commodities all the time approach is not working so far this year.
Broad commodity ETFs like the iShares S&P GSCI Commodity Index Trust (NYSEArca: GSG), PowerShares DB Commodity Indexed Tracking Fund (NYSEArca: DBC) and the GreenHaven Continuous Commodity Index Fund (NYSEArca: GCC) have declined between 7 to 12 percent year-to-date. Broad commodity ETFs attempt to mimic the performance of a group of commodities using commodity futures contracts.
Weakness in commodities is particularly pronounced among industrial metals, natural gas and “softs” like sugar.
European Cement Shoes
Europe’s financial crisis has not only spooked the world, but it’s exacerbated the fall in commodities. Many observers feel that worldwide demand for commodities could dry up as the slowdown in global economic activity in Europe spreads across the world.
“The passing of the $1 trillion EU/IMF bailout package muted investor fears only temporarily as investor’s appetite for gold still remains high,” states Fred Jheon, Managing Director of Product Development at ETF Securities. “Right now there is a flight to safety and a broader adoption to gold as a safe haven investment to diversify investment holdings and reduce overall portfolio risk.”
Indeed, one of the few havens for commodities investors has been with precious metals.
Gold ETFs (NYSEArca: SGOL) attempt to track the price of gold bullion have gained around 12% on the year. Also gold mining stocks (NYSEArca: GDX) have been handedly outperforming broad equity indexes.
The rise in gold prices has led to new gold ETF offerings.
The recently launched Sprott Physical Gold Trust (NYSEArca: PHYS) aims to track 1/100th the ounce price of gold bullion. PHYS also allows investors to redeem their shares in the trust for physical gold bullion on a monthly basis so long as the amount is equal to a London Good Delivery Bar. The trust’s annual expenses are 0.65% and the gold is held in the Royal Canadian Mint.
Other metal sectors have been riding gold’s coattails.
“Silver (NYSEArca: SIVR) and the “PGMs” or platinum group metals (NYSEArca: PPLT) have collectively benefited with rising tide and spotlight on gold,” states Jheon. “Over the medium term, PGMs have a hybrid characteristic being tied to the precious metals markets and investment demand but also tied to the industrial cycle and the global economic recovery. There is steady pickup in demand for autocatalysts (NYSEArca: PALL) in China and the broader Asian region which bodes well for the global auto industry as well as PGMs.”
Declining commodity prices have not necessarily been bad for everyone.
Investors that have shorted commodities this year are probably sitting on gains. The ProShares UltraShort DJ-UBS Commodity (NYSEArca: CMD), which attempts double daily opposite exposure to a basket of commodities, has climbed nicely by 21.18% year-to-date.
Likewise, consumers accustomed to getting scalped at the gasoline pump during the summer traveling season have experienced falling or unchanged gas prices depending on where they live. If inflationary pressures are just ahead, they have yet to arrive via rising commodity prices.
Despite lackluster performing commodities, it would be a strategic error to conclude the price for commodities will stay down indefinitely. Disruptions in the global economy may lead to future food, energy and supply shortages.
Lastly, as the confidence in the ability of world governments to resolve their fiscal problems grows, commodities acting as de facto currencies may boost commodities prices along with demand.