Commodities – Long Term Buy? Or Punt?

Fri 19 Feb 2021

By Ruairi Dennehy

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The commodity asset class is at an interesting juncture, and it is no surprise that it has generated a few questions in the last teleconference, which I answer below. If a classical global recovery is underway, there should be upside potential. But is it that simple?

The commodity asset class is at an interesting juncture, and it is no surprise that it has generated a few questions in the last teleconference, which I answer below.  If a classical global recovery is underway, there should be upside potential.  But is it that simple?
There are quite a few angles to this.
The media angle. By the time there is wide-spread discussion of anything in the media, you must be very wary. At worst, by this point you have already missed out. At best you have almost certainly missed the early growth. You need to try and figure which is the case, and also sidestep over confident experts.
The reaching out for certainty. This is very natural, and we all do it. But when investing, there is nothing which is certain. Most proclamations of experts, which have the air of certainty, are no better than someone’s best guess. Seldom is an “expert” asked for the evidence, sadly. 
Have you missed the boat? Some analysts believe oil will hit $150. Others say that recent oil price rises are completely detached from reality – and they say the same of moves by other commodities over the last week, particularly base metals.
Who is right? I have no idea. Those on both sides of this very well-argued discussion are paid six and seven figure salary packages to know the answer with some degree of useful certainty – but the truth is that they do not.
The chart story. With any investment idea, a decent place to start is to have a long term picture, and here it is for commodities, the CRB commodity index since 1994.
CRB Index
Since the peak in 2007 you would have lost about 60% of your money. What drove the index up prior to that was demand from China, which was going through a stage of huge building works.
Is China going to perform the same trick for commodities now? China is still building, but that heavy infrastructure spending is not as an economic priority for them now, as it was back then.
Much of the rest of the world certainly needs to rebuild, as we have highlighted many times over the last couple of years. This need is wide-ranging from Victorian sewers, to poor roads and railways, crumbling energy infrastructure (think Texas!), inadequate tech infrastructure, and wide-ranging change demanded by climate change.
But, whatever the climate need, none of this will happen quickly. And Western governments haven’t yet figured how to pay for all of this. That will be a long and painful debate, and may yet require another electoral cycle for change in the scale required.
The long term “super cycle”. A long-term cycle can be observed in commodities, some say lasting 17 years, up and down. Don’t over-rely on this – it is just one bit of the jig-saw. However, it does tally with the idea of the global demand increasing more gradually over years, as the world slowly re-builds.
What to buy? Managed fund, ETF, or something else? Here is a chart of two of the oldest running alternatives, a managed fund from JPM and a commodity ETF. Over that period it mostly tells us what we saw earlier – it has been a roller-coaster.
Commodity Funds Chart 2
To bring this into focus here is another chart from the lows last March.
Commodity Funds Chart 3
Here you can see that the companies which explore and mine these commodities performed better in an upturn than the commodities themselves. This is often the case.
But if commodity companies are good value at any one time, they will be bought by funds with a wider mandate. For example, JOHCM UK Equity Income has been heavy in this area for a while as it was so undervalued e.g. the likes of Glencore. Which raises another issue for you…
If you decide to buy some form of commodity fund you also have to consider what else you are not investing into. For example, are you more likely to make more money in UK equities or Asia than commodities? That is not easy to judge, but it is a question worth asking. If yes, why are you buying commodities?
Bonkers? If these relatively fringe assets are going to perform every so often, our Bonkers Portfolio will pick them up. If they aren’t performing at that level, they will not appear on the Bonkers radar. The beauty of the Bonkers approach is that you don’t have to go through mental gyrations – in the vernacular, it’s either hot or it’s not.
Now to your questions.
Andrew asked: Commodity ETFs are recommended for the more cautious with a potential crash and inflation on the horizon. Struggling to find an appropriate one. What is your opinion on this, and is there one you would recommend?
Answer: As you saw from the charts above, commodities are not for the cautious. If you are a cautious investor do not touch commodity funds.
Mike asked:
If one wanted to invest in a fund that was specifically targeting say the mining or banking sector as an example, where would you go to find such funds?
Answer: BlackRock World Mining. Jupiter Financial Opps. These are not recommendations. But they are the big players in these areas.
Ray asked: During the past GOLD surge, FE nominated a suitable Fund (S&W gold miners).
Some commentators are forecasting a SILVER surge. Is there a comparable FE Recommended Fund?
Answer: It isn’t recommended, but there is Jupiter Gold and Silver fund (formally Merian Gold & Silver) – a bit Hobsons Choice! There are a number of silver ETF’s if you search the net on this.
Hugh asked: There is increasing discussion about rising commodity prices and possibly the beginning of a new commodities “supercycle”. How do you think we will know this is under way and which funds do you recommend to ride the trend?
Answer: See the discussion above on the long-term cycle issue. Whether you should invest at all depends on whether you will make more money doing this than other alternatives. For example, Value-style funds in the UK and around the globe, many of which are currently invested in cheap company companies. JPM Natural Resources is the obvious fund with considerable pedigree.


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