Simple math when it comes to shrinking supply and increasing demand is usually good enough to guarantee bets on commodities like oil, gold and silver, but a slew of other investments in the market have been underperforming, largely due to a slowdown in the Chinese economy. Buys in things like timber, copper and natural gas have been slipping, but the market may be headed for a turnaround and experts advise investors to keep an eye on Chinese economic data to better predict the pricing on industrial and agricultural commodities. For more on this continue reading the following article from TheStreet.
Many investors have used precious metals to hedge against weak monetary policies of central banks around the world. Other investors believe that you can’t go wrong with “black gold,” since the global demand for oil will eventually outstrip the available supply.
On these simple assessments, those who chose the PowerShares DB Precious Metals Fund (DBP) have seen their selection rise 22% over the previous 12 months; those who selected the PowerShares DB Oil Fund (DBP) have been rewarded with roughly 7% year-over-year.
However, other than a few choice commodities — gold, silver, oil — heavy exposure to additional exchange-traded commodity funds/notes have others feeling numb. Natural gas, grains, timber, copper, diversified agriculture and diversified industrial metals have underperformed U.S. stocks as measured by the S&P 500 SPDR Trust SPY.
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| What’s Up (Or Down) With Commodity ETFs/ETNs? | ||||||
| Approx 1-Year % | ||||||
| PowerShares DB Precious Metals (DBP | 22.2% | |||||
| PowerShares DB Oil (DBO) | 7.0% | |||||
| S&P 500 SPDR Trust (SPY) | 4.6% | |||||
| iPath DJ AIG Livestock ETN (COW) | 2.1% | |||||
| iShares S&P GSCI Total Commodity (GSG) | 1.6% | |||||
| PowerShares DB Agriculture (DBA) | -6.8% | |||||
| iPath DJ AIG Total Commodity (DJP) | -7.3% | |||||
| iPath DJ AIG Agriculture ETN (JJA) | -13.2% | |||||
| PowerShares DB Base Metals (DBB) | -14.5% | |||||
| iPath DJ Grains (JJG) | -16.5% | |||||
| iPath DJ Copper (JJC) | -16.6% | |||||
| United States Natural Gas Fund (UNG) | -40.1% | |||||
In part, the poor performance can be attributed to the growth slowdown in China. That said, Chinese officials recently shifted from a tightening bias to a loosening bias with a lowering of their bank reserve requirements.
In theory, the increased likelihood of a soft economic landing in China coupled with increased demand for “stuff” should have boosted underperforming commodities over the previous week. In practicality, however, industrial metals jumped on the China news, whereas other commodity ETFs/ETNs failed to fully support a “risk on” appetite.
| Performance Since China Lowered Bank Reserve Requirements | ||||||
| 11/30-12/7 | ||||||
| PowerShares DB Precious Metals (DBP) | 1.6% | |||||
| PowerShares DB Oil (DBO) | 1.8% | |||||
| S&P 500 SPDR Trust (SPY) | 5.7% | |||||
| iPath DJ AIG Livestock ETN (COW) | -2.6% | |||||
| iShares S&P GSCI Total Commodity (GSG) | 1.1% | |||||
| PowerShares DB Agriculture (DBA) | -1.5% | |||||
| iPath DJ AIG Total Commodity (DJP) | 0.2% | |||||
| iPath DJ AIG Agriculture ETN (JJA) | -0.6% | |||||
| PowerShares DB Base Metals (DBB) | 4.2% | |||||
| iPath DJ Grains (JJG) | -1.2% | |||||
| iPath DJ Copper (JJC) | 4.5% | |||||
| United States Natural Gas Fund (UNG) | -5.6% | |||||
It is possible, if not probable, that ongoing concerns over a pan-European recession are depressing commodity prices. What’s more, there is still an unusually high demand for U.S. dollars, dampening desire for commodity assets which are priced in greenbacks.
Nevertheless, one should continue monitoring China ETFs as well as China economic data. The more evidence for a soft economic landing in China, the more likely that commodities of all stripes would recover bullish momentum.
This article was republished with permission from TheStreet.
