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Turning point in sight for commodities

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The monthly commodities note from ETF Securities predicts that commodities as an asset class may be in recovery from their underperformance for the past five years.

 The firm writes: “In 2015, we have observed clear signs that a turning point is in sight. The prolonged period of underperformance has driven miners, smelters, drillers and other resource extractors to cut capital expenditure (capex), sowing the seeds for supply tightness in years to come. We can see that the cuts to capex are already biting into supply. Copper, platinum, palladium and silver for example have been in a supply deficit for years. The fact that prices have not risen in response to thissituation appears be a symptom of poor sentiment pervading the sector.”
 
ETF Securities believes that the fundamentals are clearly more positive. “The extent of commodities’ underperformance has narrowed in 2015. Year-to-date performance of gold in US dollars for example is in line with the Russell 2000 equity index despite all the fears of a rising interest rate environment disproportionately affecting the metal. In a matter of weeks the US central bank is likely to raise interest rates for the first time in nine years. The expectation has weighed on the metal’s performance. However, the typical ‘buy on the rumour, sell on the news’ investor behaviour, could benefit gold after the move is made.”
 
The firm finds that El Niño is making its mark as by some measures, the weather phenomenon is already the most extreme event on record (with records dating back to 1950). “Sugar and cocoa prices have rallied over the past three months, while coffee and soybeans have dropped over the same time horizon as growing conditions have worsened for the former and improved for the latter. We believe that while the sugar rally is largely over, cocoa has further to rise while coffee, soy and corn have further to fall.”
 
As central bank policies diverge, returns to gold in Euros and US Dollars will
diverge too, the firm predicts. “Despite the fears of what looming US rate rises have in store for gold, for European investors, the monetary attributes of gold remain favourable with the ECB implicitly devaluing the Euro with stimulus. While investors are reducing holdings, physical demand from Asia remains robust, with Swiss exports to China at a seven month high.”
 
Industrial metals have seen another month of weak prices largely driven by pessimism around China, the world’s largest consumer of metals.
 
“That has ‘upped the ante’ in the precarious situation facing miners and we are likely to see severe cuts to production continue” the firm writes.
 
Turning to oil, ETF Securities says that the cure for low oil prices is low oil prices. Swelling inventories and rising short futures market positioning saw oil benchmarks flirt once again with the lows reached in December 2008. “Conflict in Syria is likely to do little to reduce global supply, given how little oil comes from the country in the first place” the firm writes, concluding that further evidence of supply cuts are likely to break the negative sentiment. “We see ETP investors generally encouraged by the upside potential.”

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