Robert Minter, Director of ETF Investment Strategy at abrdn, reports that the firm’s ETF business is standing at ‘meaningfully’ over the USD9 billion mark, up from USD1.5 billion in six years, due to appreciation and flows.
Commodities are an important part of the abrdn ETF offering and Minter comments that commodities are not as well-known as stocks and bonds.
“Even when I speak to equity managers with 20 years of experience, they can have a misunderstanding of individual commodities and what is going on in the commodities market.”
Top issues include the continuing difficulties mines face getting access to capital and the lengthy process of mine development which averages over 20 years to bring new mine supply to market.
“Which is what makes it interesting for me. Commodities have different drivers from other markets and that is why people like to hold commodities in their portfolios because they are uncorrelated.”
Minter’s view on how the US Presidential election will impact commodities is that there are no high conviction trades to make based on policy changes.
“The election is on the top of everyone’s mind here but at this point everyone knows who they are going to vote for – they just want it over and done so they can get back to business,” Minter says.
“We have one candidate who was unclear about his policies during his presidency and the other candidate wasn’t even a presidential candidate until a few months ago and has kept most of their policies private, which leaves us with ‘what exactly are we going to get policy wise?’
“Neither candidate has a history of tradable policy initiatives even if we knew who was going to win on November 5th.”
Minter says that the polling results, at the time of writing this, are within the margins of error, flip flopping in the swing states: “So no clear outcome from that either.”
“Investor sentiment is very clear that post-Covid, the public and the investing community doesn’t want to hear a view, they want them to justify a view.
“Words aren’t enough – prove it to me,” he says. “Where we do get a clear portfolio opportunity based on public sentiment is from their portfolios where sentiment is historically very negative on commodities.”
The CFTC data reveals the real sentiments on oil, Minter says.
“September 10th figures show that money managers were only long 47,000 contracts in oil, the lowest number since 2011 which means they are more negative on the price of oil than during the European debt crisis or the Covid lockdowns of 2020.
“They think that oil prices will go down but after eight previous periods with extremely low sentiment the average return on oil in the following six months was 46 per cent – so there is a contrarian indicator showing that the price may go up. And all eight of those periods of low sentiment had positive returns afterwards.”
Minter believes that there is no geopolitical risk priced into the current price of oil. “Despite multiple ongoing geopolitical conflicts, we would suggest that if people have a low allocation to oil, they should consider raising it to an average level of hedge in their portfolio.”
Turning to gold, Minter says that it has ‘taken investors by surprise’. “What is really difficult is getting across to people why and how did it get to USD2,700?” he says.
Industrywide, ETF investors have sold 810 tonnes of gold in the last two years even as the gold price hit all-time highs – 35 times this year.
“So how come everyone is selling when the price is going up,” Minter says. “One demand segment is gold ETF investors who tend to base decisions off real interest rates and they were rising during that time, so they were selling gold. The complication is that central banks bought almost three times as much gold as ETF investors were selling which has supported the price and pushed it up this high.
“Central banks are buying it because the US has weaponised the dollar using the SWIFT system of settling dollar trades as an arm of US foreign policy. One of the main risks to emerging market countries is sanctions so this talk of foreign countries considering seizing foreign assets doesn’t help. It pushes people away from the dollar and so they buy gold instead as a diversifier.”
But those investor sales may be coming to a halt. Minter’s research reveals that the last three times the Fed shifted to cutting rates was 2000, 2008 and 2018 and gold went up 57 per cent, 235 per cent and 69 per cent, respectively.
“So that shift to a lower rate regime has kicked off gold bull markets the last three times so we think that ETF investors owning the same number of ounces of gold as they did before Covid makes no sense to us, so we think that upswing from investor demand is about to kick off again.”
Finally, Minter takes a look at platinum and palladium, metals whose demand is affected by the speed of the transition to electric vehicles.
Electric vehicles in the US are not in high demand, causing high discounts, but
charging them has not been efficiently organised, something that has been sorted in China, he says.
“In the US home charging costs 15c a kilowatt, equivalent to USD1.10 a gallon. But on a public charger, which anyone living in an apartment would have to use, it costs over USD4.00 a gallon, more than the price of gasoline in every place in the US, other than California. In China the cost is 15c a kilowatt at public chargers.”
Platinum prices are down 25 per cent since 2021 and palladium are down 66 per cent since March 2022.
“Part of that reason is the negative sentiment toward the metals based on the view that everyone was supposed to want an electric vehicle which is not the case,” Minter says.
“The 2024 Deloitte global consumer survey of automobiles found that 88 per cent of car buyers in the US preferred hybrid or fossil-fuelled cars and in both of those cases you need pollution control devices which use platinum and palladium.
“It’s the complete opposite of what was priced into the market, so it looks like an opportunity to us. Platinum and palladium prices are currently below the cost of some mines to produce it – some mining companies have reduced their work force and cancelled future expansion plans for other mines, but demand is going to be higher than has been assumed based on a rapid switch to EVs.”
Minter says that the broad commodities sentiment also contains a contrarian view. A recent Bank of America/Merrill Lynch Fund Manager Survey shows that broad commodity allocations are at a seven-year low and the average manager is shorting commodities by 15 per cent with strong negative views on the Chinese economy and the lack of stimulus, but, he says, historically, periods of extreme sentiment like this are when the index rises.
While public sentiment on future US policy lacks a decisive outcome, the negative sentiment in some areas of the commodity market does indicate extreme negative sentiment which has been a good time for contrarian investment historically.
