Commodities may now be the most hated sector of the market.
“Investors flee commodities,” announced one Wall Street Journal headline this week.
We hear the siren call of capitulation. Or at least the song of the contrarian.
Cullen Roche is one such voice. The founder of Orcam Financial writes on his popular blog Pragmatic Capitalism that commodities are ready for a little love.
And not just because every news agency in the world is pouring so much hate on gold, oil, and all the other products in the commodity universe. There’s just common sense and history on his side. As Roche notes: commodities fare poorly at the beginning of a business cycle and then improve toward the end.
At 72 months into a recovery period, we’re likely entering the late stages of the business cycle, Roche says. We are witness to “peak hatred.”
All this bearishness has me feeling more bullish about the potential that we’re moving into a late expansion phase and a phase where commodities might do better than stocks and/or bonds at points in the coming years.”
A number of investors piled into commodities during the rally when the dollar was weak and there were fears of global shortfalls. Now that tables have turned. Many don’t expect the fundamentals to change, including this manager who sold his gold holdings last week:
“If our expectations play out for the dollar and yields, that could mean further downside for gold prices,” says Nicholas Johnson, portfolio manager at Pimco, in the Wall Street Journal.
He may be a little late: Gold is down more than 40% in the last five years and silver has plunged 70%. Copper is in the same boat, with a 45% drop, and oil is down 55%. The Bloomberg Commodity Index has plummeted 60% from its 2008 peak.
Overall, commodity sector-funds suffered about $1.1 billion in outflows during the second quarter of 2015, the Wall Street Journal reports.
Cullen doesn’t recommend building a portfolio around commodities, but they do serve their purpose in providing an uncorrelated return asset as wages and inflation rise. Right now, investors are anticipating a rising dollar making raw materials expensive.
Commodities should be thought of as something you rent, not own, adds Roche. “Commodities are non-financial assets. This means that they are generally cost inputs in the capital structure. As such, they should not be viewed as “investments”. They are, at best, hedging tools in a portfolio,” he says. And don’t think of gold as something special, adds Roche. It’s the same as any other commodity.
Photo:Mark Herpel