Roland Morris Archives

Commodities Show Signs of Recovery

Morris: ”We have seen commodities prices stabilize and some very encouraging signs…. We believe this is the kind of action that could set the stage for a longer term positive cycle.”

Morris follows up on his November 2015 video on commodities, with this fresh look at the commodities landscape.

Prices Stabilize in First Quarter

TOM BUTCHER: The last three to four years have been challenging for commodities but it appears that prices have stabilized. Is that right?

ROLAND MORRIS: It is certainly starting to look like that. In the first quarter of 2016, we have seen prices stabilize and some very encouraging signs. We have also seen some recovery in commodity currencies. Gold bottomed in December 2015 and it is now up about 20% off that low [period from 12/17/15 to 3/22/16]. We had copper bottom in January and it is now about 17% off its low [period from 01/15/16 to 3/22/16]. Crude oil bottomed in February and it is up about 16% for the year [YTD as of 3/22/16]. We have seen what appears to be a base-building over the past two quarters. This is very encouraging. We believe it is the kind of action that could set the stage for a longer term positive cycle. Last year in 2015 we experienced what was a false start, but this year it feels more like this could be the real thing.

Confidence Improves as China Fears Lessen

BUTCHER: Going into 2016 there was major concern about the outlook for China. Has that been ongoing?

MORRIS: I think that is one of the factors that contributed to what appears to be improving price trends in commodities. When you look back to the beginning of this year to January, we experienced a major decline in China’s stock market and its currency. This caused tremendous fear among investors that the worst case scenario was about to play out in China and that would have been a hard landing and possibly a forced currency devaluation because of capital flight. Since then things have calmed down a great deal. In February, capital outflows from China slowed markedly. I believe this is one of the key reasons we are seeing some restored confidence in commodities right now.

Fed’s Softening on Rates Helps Commodities

BUTCHER: Are there any other factors that have helped improve the outlook for commodities?

MORRIS: I believe another important factor in commodities’ recent strength has been the shift by the U.S. Federal Reserve (Fed). The Fed indicated at its March meeting that it viewed current global financial developments as negative and it felt it needed to defer its proposed tightening program. That set the stage for some weakness in the U.S. dollar. The strengthening dollar trend had been one of the major headwinds facing commodities over the past three years. I think investors are starting to believe that the Fed will not be aggressive in raising rates and this has put a cap on the U.S. dollar’s appreciation, which has been very helpful for commodities.

BUTCHER: Can you provide me additional details about stabilization across the commodity spectrum?

MORRIS: We started making the following argument late last summer. We have felt that because of the reduction in capex (capital expenditure) across a number of commodities sectors and curtailment of investment, particularly in energy and industrial metals, investors have underappreciated the supply response. This is what we consider the fundamental story. Combined with improvements in some of these macro factors, this is what supports our point of view that this is the beginning of a new, positive cycle for commodities. It is against this backdrop, i.e., the reduction in supply, that we consider when looking out over the next two to five years.

Why this Period is Different from a Year Ago

BUTCHER: Do you think this is one of the distinguishing features between now and the situation back at the beginning of 2015?

MORRIS: Last year we certainly had some encouraging signs at the beginning of the second quarter, including appreciating price trends when crude oil went from $40 per barrel to $60 per barrel. Unfortunately that just petered out as the year progressed. I think the difference this time is the duration. We like to talk about fixing low prices, which requires a period of time to take hold. I think what is different now is we are a whole year further into the cycle and those capex cancellations from reduced investment may bring down supply significantly. From my perspective, the reason this may not be a false start is that we’ve had a longer period of low prices and it is both low prices and their duration that I believe help form a base.

BUTCHER: Have you had any interesting questions crop up in recent meetings with investment clients?

Interest in Commodities is on the Upswing

MORRIS: Yes. Just recently a client asked me what I think about our investments at VanEck in natural resources, including gold, etc. The client inquired how those investments might work in the event of a major negative geopolitical event. I had not been asked that question before. When you think about it, gold investments have the potential to provide protection in an unsafe environment. Additionally, natural resources by themselves can be considered a safety in a volatile investment climate because they are hard assets. The client’s question was interesting and I do think natural resources and gold in particular can do well in a tough environment.

BUTCHER: Have you been seeing any change in investor sentiment?

MORRIS: Overall I think clients have been more receptive. We have spent considerable time over the past few months meeting with institutional clients as well as other types of investors. My sense is that investors are starting to believe that now might be the time to consider either increasing natural resource investments or looking at them for the first time. I think this is partially because price trends have obviously improved in the first quarter. I also think most investors believe the Fed is unlikely to become aggressive with monetary tightening. We feel the Fed is more worried about the global growth environment and consequently it will probably keep the U.S. dollar contained. I think investors are starting to recognize that without the headwind of an appreciating U.S. dollar, natural resources may appear more attractive.

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You can lose money by investing in a commodities fund. Any investment in a commodities fund should be part of an overall investment program, not a complete program. Commodities are assets that have tangible properties, such as oil, metals, and agriculture. Commodities and commodity-linked derivatives may be affected by overall market movements and other factors that affect the value of a particular industry or commodity, such as weather, disease, embargoes or political or regulatory developments. The value of a commodity-linked derivative is generally based on price movements of a commodity, a commodity futures contract, a commodity index or other economic variables based on the commodity markets. Derivatives use leverage, which may exaggerate a loss. A commodities fund is subject to the risks associated with its investments in commodity-linked derivatives, risks of investing in wholly owned subsidiary, risk of tracking error, risks of aggressive investment techniques, leverage risk, derivatives risks, counterparty risks, non-diversification risk, credit risk, concentration risk and market risk. The use of commodity-linked derivatives such as swaps, commodity-linked structured notes and futures entails substantial risks, including risk of loss of a significant portion of their principal value, lack of a secondary market, increased volatility, correlation risk, liquidity risk, interest-rate risk, market risk, credit risk, valuation risk and tax risk. Gains and losses from speculative positions in derivatives may be much greater than the derivative’s cost. At any time, the risk of loss of any individual security held by a commodities fund could be significantly higher than 50% of the security’s value. Investment in commodity markets may not be suitable for all investors. A commodity fund’s investment in commodity-linked derivative instruments may subject the fund to greater volatility than investment in traditional securities.

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by Roland Morris, Portfolio Manager and Strategist
Roland Morris is a veteran of commodities investing with more than 35 years of experience. Morris is Portfolio Manager and Strategist for commodity investing at VanEck, and is a member of both the commodities and hard assets investment teams. Read full bio.

When Will Commodities Recover?

When Will Commodities Recover? Commodities have been in a multi-year bear market, with especially sharp drops in the past year. As commodity investors, this begs the question: When will commodities bottom and begin to recover?

The history of markets suggests that an upward cycle in prices is inevitable. Putting aside the fact that the fundamentals, in general, may support a turnaround, if this is a traditional commodity cycle – and that is a big caveat – investors may continue to wonder when the mayhem will end. We believe that it could be reasonably soon.

Non-fundamental, or technical, analyses can be helpful for timing cycles. Markets often move regardless of what fundamentals may indicate. The third quarter was a prime example of this phenomenon. We saw a huge, sudden fall in commodity prices, but there were no material changes in global demand. Additionally, there was no significant change in China’s economic growth; China’s growth was slowing well before the third quarter and we believe this trend will continue.

Our Analyses Point to the First Half of 2016

Assuming this is a normal cycle, and unless commodity prices fall much further, most of our analyses suggest a bottom may occur during the first half of 2016, and most likely in the first quarter.

We examined two different indicators: the length of prior cycles and long-term price momentum.

1) Prior Commodity Cycles

First, we looked at commodity cycles historically, as shown below in Chart A. Prior cycles suggest to us that the end of March 2016 might be the time to start buying. Past commodity downturns have generally lasted approximately 18 months. We’re 11 to 12 months into the current downturn, and six months more bring us to March, or the end of the first quarter of 2016.

Chart A: Commodity Cycles Usually Last 18 Months

Measure: CRB Commodity Composite Price Index1

1See CRB Commodity Composite Price Index definition below.
Notes: Shaded areas are longer periods of falling commodity prices (> 10 months).
Source: Financial Times, Haver Analytics, Deutsche Bank Research. Data as of October 2015.

A Closer Look at Oil Prices

Let’s look specifically at historical oil prices. WTI crude oil returns are currently near historic lows as shown in Chart B below. The lows of trailing 18-month price returns for WTI have historically been tested at approximately -50%. We have already seen these levels this year: as recently as September, October, and November.

Taking a different perspective on oil, we note that price cycles generally last 15 months. The length of the current downturn is 15 months. At least one prior crude supply/oversupply cycle (1994-2003) suggests getting invested now.

Chart B: Oil Prices Don’t Typically Correct More than 50%

Measure: WTI Crude Oil Price Returns, Trailing 18 Months

Notes: Red Line at -50%: Lows have historically been tested at approximately -50%.
Dotted Yellow Line at -25%: Longest period of < -25%=”” trailing=”” return=”” is=”” 17=”” />
Average period of < -25%=”” trailing=”” return=”” is=”” 6=”” />
Current period of < -25%=”” trailing=”” return=”” is=”” approximately=”” 11=”” months=”” (nov.=”” 2014=”” to=”” />
Source: Bloomberg. Data as of September 30, 2015.

2) Long-Term Price Momentum

We also looked at a long-term commodities momentum signal: the 250-day moving average. This indicator signals a ”buy” when the current price is above the 250-day moving average. As shown below in Chart C, the Morningstar Long/Flat Commodity Index (which uses the 250-day moving average) currently is less than 2% invested/long exposure in commodities. Let’s look forward and assume two possible price scenarios: 1) a bullish scenario that assumes prices increase 20%; and 2) a flat scenario that assumes commodity prices stay at current levels. The bullish scenario indicates that the Morningstar Long/Flat Commodity Index signal would be more than 50% invested in commodities by April 2016. The flat scenario pushes this 50% invested date out to August 2016. If you are a bullish investor, we believe the time to invest is some time in the first quarter of 2016, well before the final signal in August should prices stay flat.

Chart C: Using a Longer-Term Signal to Get Reinvested in Commodities

Measure: Morningstar Long/Flat Commodity Index2

2See Morningstar Long/Flat Commodity Index definition below.
Notes: Calculation based on current commodity weightings in Index and uses each commodity’s 250-day moving average; Index weightings adjusted on third Friday of month.
Source: Morningstar, Van Eck Research. Data as of November 5, 2015.

Van Eck’s Approach

Here at Van Eck, we are generally bottom-up investors, i.e., we deal in fundamentals. More precisely, we focus most of our attention on companies that can provide shareholder return despite what the markets might be doing. Of course you cannot really escape the markets, but we focus on companies with quality management teams that have the potential to add value.

Supply Drives Markets, Not Demand

Similarly, when we look at commodity markets, we focus primarily on supply. We don’t believe demand drives markets. We think that supply drives markets and that analyzing supply is a bottom-up, fundamental exercise. We look at particular markets for commodities and whether supply will increase or decrease based on the behavior of suppliers and producers.

When it comes to timing cycles, however, fundamentals may not always be the best bet. We believe it makes sense to mix technical and fundamental analyses, and given our current findings, we believe you should give serious thought to allocating to commodities.

Video: Commodities Poised to Rebound in 2016

My colleague Roland Morris, Commodities Strategist, goes into greater depth on how the current supply dynamics in commodity markets are positioning the space for a likely rebound in 2016.

Van Eck Views Blog

November 25, 2015
by Jan van Eck, CEO

An innovator of investment solutions, Jan van Eck has created a multitude of strategies spanning international, emerging markets, and commodities opportunities. van Eck plays a very active role in helping to shape the firm’s mutual fund, ETF, and alternative investment offerings. As CEO, his approach is guided by the wisdom gained from the firm’s 60 year history.

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1NYSE Arca Gold Miners Index (GDMNTR) is a modified market capitalization-weighted index comprised of publicly traded companies involved primarily in the mining for gold. 2Market Vectors Junior Gold Miners Index (MVGDXJTR) is a rules-based, modified market capitalization-weighted, float-adjusted index comprised of a global universe of publicly traded small- and medium-capitalization companies that generate at least 50% of their revenues from gold and/or silver mining, hold real property that has the potential to produce at least 50% of the company’s revenue from gold or silver mining when developed, or primarily invest in gold or silver. 3Tail risk is the risk of an asset or portfolio of assets moving more than three standard deviations from its current price. 4S&P 500® Index (S&P 500) consists of 500 widely held common stocks covering industrial, utility, financial, and transportation sectors. 5Dot-com bubble grew out of a combination of the presence of speculative or fad-based investing, the abundance of venture capital funding for startups and the failure of dotcoms to turn a profit. Investors poured money into internet startups during the 1990s in the hope that those companies would one day become profitable, and many investors and venture capitalists abandoned a cautious approach for fear of not being able to cash in on the growing use of the internet. 6Source: Bloomberg.

Please note that the information herein represents the opinion of the author and these opinions may change at any time and from time to time. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Historical performance is not indicative of future results; current data may differ from data quoted. Current market conditions may not continue. Non-Van Eck Global proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Global. ©2015 Van Eck Global.