Many analysts have postulated that the so-called commodity super-cycle popped back in 2008 when the global economy collapsed. If it didn’t then, you can definitely make the case that it has over the last year or so. As many emerging market economies have seen growth dwindle, so has overall commodity demand. Funds tracking various natural resources futures contracts- like the popular PowerShares DB Commodity Index Tracking (NYSE:DBC) –still haven’t recovered from their former glory-day highs.
However, some analysts are beginning to see some pockets of strength going into the New Year.
For investors, the overall collapse in commodity prices could be a great buying opportunity to load up on the natural resources beginning to show promise.
Continued Losses In Commodities
Chalk 2013 as another round of terrible losses for those investors in the hard asset sector. The futures-tracking iShares S&P GSCI Commodity-Indexed Trust (NYSE:GSG) lost 1.2% throughout the year. However, many investors did much worse. According to fund research company Lipper, the average actively managed global commodity fund sector lost a whopping 9.98%. In fact, only two of the 122 commodity funds tracked by Lipper managed to generate a positive return at all.
The past three years haven’t been much better either- with commodity mutual funds/ETFs averaging a 6% annually loss during that time. With those kind of losses on their books, it’s easy to see why investors have pulled a net $14 billion from commodity funds since 2012. Slowing emerging market grow and dwindling inflation expectations can each take credit for the sectors problems.
Yet, the new year might be a bit different for select hard assets. The reason? Rising developed market growth, along with various supply cutbacks and constraints.
Industrial growth in United States and key European exporters has finally begun cooking, boosting demand for steel, nickel and other base metals. Meanwhile, natural gas and oil demand continues to rise to new peaks. At the same time, the low prices of many industrial commodities have caused producers of these resources to curtail and cutback on production. Analyst now predict that several of these cutbacks with begin having an effect starting this year for a natural resource sectors.
Meaning that the bottom for several commodities maybe in and the time to buy could be now.
Making A Select Natural Resources Bid
While a broad-based natural resources fund like the iPath DJ-UBS Commodity Index TR ETN (NYSE:DJP) or producers-based FlexShares Global Upstream Natural Resources ETF (NASDAQ:GUNR) might make sense, not all commodities are expected to see real returns in the upcoming year. The time to get tactical is on.
One of the biggest bright spots are the industrial metals.
As the U.S. and Europe has returned, inventories of copper, nickel and zinc have all started to be diminished. Already, nickel prices have moved up about 3.39% since the start of the year. The PowerShares DB Base Metals (NYSE:DBB) tracks equal-weighted futures contracts of the three major industrial metals- aluminum, copper and zinc. The fund has been a real downer since inception, but could be ripe for a rebound as inventories fall and demand rises. Expenses for DBB aren’t cheap at 0.73%, but are still far less than the dedicated futures fund. Nickel can be added via the iPath DJ-UBS Nickel ETN (NYSE: JJN), while rising automobile demand is seen boosting platinum funds like the ETFS Physical Platinum Shares (NASDAQ:PPLT).
Another interesting option can be had in the shares of the beaten-down producers of these commodities. The broad SPDR S&P Metals & Mining ETF (NYSE:XME) covers everything from gold and silver production to steel and coal. Overall, the ETF tracks 41 different firms- including Kaiser Aluminum (NASDAQ:KALU) and Arch Coal (NYSE:ACI). And at 0.35% in expenses, it’s pretty cheap option for investors.
Finally, crude oil could be another bright spot for commodity investors. According to analysts at PIMCO, the current backwardation in the crude oil futures market could net investors a 10% price appreciation gain from roll conditions. Likewise, improved infrastructure should help drive prices for U.S.-based WTI crude higher throughout the year. That means the United States Oil ETF (NYSE:USO) might finally be worthy of buy.
The Bottom Line
While the commodity super-cycle maybe slowing- or even dead- that doesn’t mean that natural resources shouldn’t be banished from your portfolio. Several of them will still experience price upswings in the years ahead. For investors, that means getting tactical. The previous picks in the base metals and crude oil are some of the best ways to position yourself into the new year.
Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.
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