Excessive Bearishness Indicates, Commodities Perfectly Poised for a Major Upswing

Excessive Bearishness Indicates, Commodities Perfectly Poised for a Major Upswing

Commodities Perfectly Poised for a Major Upswing

Commodities may finally be on the upswing.

The market has taken a beating over the last decade. After peaking in July of 2008, the Bloomberg Commodity Index BCOM has fallen almost 70%, dragged down by an oversupply of oil, a rising dollar, and flagging demand.

But some experts have suggested the so-called “commodity super-cycle” may have bottomed out.

That’s the bet that William Rhind, CEO of GraniteShares, made this month. GraniteShares, a New York-based ETF startup, unveiled its first two funds May 22, which both provide broad exposure to the commodities market.

“Consumption is there, these commodity indices are trading well below their historical mean, and it’s a cyclical business,” Rhind said.

Rhind, who previously worked at ETF giant iShares,  said the combination of potential pro-inflation domestic policy in the U.S., rising global GDP, OPEC supply cuts, and a falling dollar could all spell good news for commodities.

The World Bank this month estimated a 24% increase in oil prices next year, driven by a 1.4% increase in consumption that could eliminate OPEC’s excess oil reserves. Prices could rise even higher if an OPEC production cut holds, or if further cuts are added. Political disruptions in oil-producing and transporting nations could also contribute to an increase in prices
Metals prices may also rise, thanks to an increase in demand in China and unexpected supply constraints. The rise could amount to as much as 16%, the World Bank noted.

A falling dollar could also boost commodities sales by making commodities cheaper, as almost all commodities are priced in dollars. The dollar has fallen 5% since the start of the year compared to a basket of major currencies, and President Trump has signaled his desire for it to go lower – though his ability to influence the price of the currency is limited.

There are reasons to be skeptical.

A rise in production in U.S. shale could offset the demand increase for oil. The U.S. produces more than 5 million barrels of shale oil a month, according to the Energy Information Administration, with estimates putting future growth at a rate of more than 100,000 barrels a day.

“The resilience of the U.S. shale oil industry presents a considerable downside risk for oil prices,” the World Bank authors noted.

While President Donald Trump campaigned on policies that could boost inflation, such as tax cuts and infrastructure investments, the president has been having difficulty turning campaign proposals into law. While a March attempt to revise the nation’s healthcare policy ended in failure, last week’s highly touted “infrastructure week” was light on policy and failed to impress shareholders of major construction companies.

Another factor that could raise oil prices, an OPEC production cut, hasn’t moved oil prices in the direction that exporters had hoped. While compliance is at record highs, the cuts haven’t been deep enough to impress investors.

Michael Cembalest, an analyst at J.P. Morgan, wrote in 2016 that the commodity cycle could last between 15 to 30 years, suggesting that there would still be many years before there was a recovery. But he also noted that commodity prices tended not to decline by more than 70%, which could mean that the market had already bottomed out.

“For investors, I think ‘price’ is more important than ‘time’ when thinking about where we are in this cycle.”

That could mean the market is due for a recovery. – Tucker Higgins

Commodities a top contrarian bet – BofA Merrill Lynch

Commodities look a top bet for contrarian investors, Bank of America Merrill Lynch said, after funds slashed their exposure to the sector at the fastest rate in seven years, amid economic growth fears.

The proportion of fund managers saying they are “underweight” in their allocations of cash to commodities exceeds those “overweight” by 15 percentage points, according to a monthly survey by the bank.

While well short of the most bearish positioning on record – with the net figure on occasion exceeding 30 points, most lately in 2015 – the growth in the figure of 12 points month on month was unusually large.

It indicates the “largest drop since June 2010 in allocation to commodities”.

Economy hope fades

Indeed, the data indicated a “rotation out of commodities, Japan, materials and banks” in favour of investing in “staples, cash, utilities and the UK,” although allocations to the UK remain weak from a historical perspective.

The broad investment trend, including the pessimism on commodity prices reflects waning expectations for world GDP expansion, with the proportion of fund managers expecting a stronger world economy, over those seeing a weaker one, at 39% down 23 points from a January high.

Expectations for inflation have dropped too, with the survey, of 180 fund managers with investments of $513bn, showing a net figure of 60% seeing a rise in the rate of price growth, below an April high of 75%.

The findings suggested that contrarian investors should “sell Europe, banks, technology,” BofA Merrill Lynch said, while buying the UK, resources, commodities and bonds.

Longs vs shorts

Funds’ negative sentiment towards commodities has been shown up in agriculture in data too from the Commodity Futures Trading Commission, the US regulator, which showed the managed money net short in major US-traded ag commodity futures and options at 244,606 lots as of late May.

That represented the second largest net short on data going back to 2006, with bearish positioning in grains indeed at a record high.

The downbeat positioning on commodities also follows a long period of poor returns for bulls in the sector, with the benchmark Bloomberg Commodity Index losing value in five of the past six years, down so far in 2017 too, touching a 13-month low in early deals on Tuesday.

The plight of the asset class has, however, provided strong returns for investors holding short bets, a factor that fund managers such as Schroders and CoreCommodity have sought to exploit by unveiling products capable of holding long or short positions.

New York-based Gresham, one of the pioneers of promoting investment in commodity futures as an asset class with little correlation to shares and bonds, was last month revealed to have ditched its long-only strategy, launching two funds capable of taking short bets too. – Agrimoney

The last time this happened, gold soared more than 500%

It’s one of biggest extremes we’ve ever seen…

Are we approaching another massive turning point in the markets? If the following chart is any indication, the answer is a resounding yes…

The chart shows the commodities-to-stocks ratio over the past 47 years. This ratio compares commodities – as tracked by the SP GSCI Commodity Index – with the benchmark SP 500. The red circles show times when commodities have become extremely expensive relative to stocks. And the blue circles show times when commodities have been extremely cheap compared with stocks.

As you can see, this ratio has now fallen to an extreme level rarely seen over the past five decades…

In fact, it is now even lower than either of the previous two bottoms…

Some of you may recall the first… It was just before President Nixon took the U.S. dollar off the gold standard. Over the next several years, inflation shot higher… commodities soared… and stocks entered a brutal bear market.

The second bottom occurred just before the final run-up in the dot-com boom. Again, over the next decade, commodities dramatically outperformed stocks. The broad GSCI Commodity Index rose nearly 300% from January 1999 through the end of 2007, while the SP 500 gained less than 30%.

Today’s historic lows suggest “real” assets could once again be set to beat financial assets over the next several years.

This could also be great news for gold in particular… As Luke Gromen – founder of macroeconomic research firm Forest for the Trees – noted this week, gold soared nearly 1,800% and 600%, respectively, following the last two lows. – Justin Brill

 

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