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Goldman Sees Gold to Corn Losses After Bear Markets

Thursday, 30 January 2014 07:05 AM

Banks led by Goldman Sachs Group Inc. and Citigroup Inc. say commodities are heading for losses in 2014 as rising supplies and slowing demand compound slumps that led to bear markets last year in gold, copper and corn.

Open interest measuring holdings across the 24 commodities tracked by the Standard & Poor’s GSCI Spot Index fell for three straight quarters through December, the longest slump since the global recession in 2008. The super cycle that led commodities to almost quadruple since 2001 is reversing, with prices set to drop 3 percent in 12 months, Goldman said. The asset class will be a “wallflower” compared with equities, Citigroup said.

Raw materials from copper and corn to sugar and coffee will be in surplus this year after a decade-long bull market spurred producers to build new mines, drill more wells and expand planting of crops. Investors pulled a record $43.3 billion last year from commodity funds tracked by EPFR Global, and hedge funds cut bullish bets across 18 U.S. futures by 53 percent from an all-time high in September 2010.

“Supply growth is still formidable across most commodities,” said Rob Haworth, a Seattle-based senior investment strategist at U.S. Bank Wealth Management, which oversees $115 billion. “It will take some time for actual demand trends to start to overwhelm that increasing supply.”

The S&P GSCI dropped 0.9 percent this month and 2.2 percent last year, while the MSCI All-Country World Index of equities slid 4 percent, after surging 20 percent in 2013. The Bloomberg Dollar Index, a gauge against 10 major trading partners, has climbed 0.8 percent since the end of December. The Bloomberg U.S. Treasury Bond Index advanced 1.6 percent.

Lagging Equities

The S&P GSCI Enhanced Commodity Index, which measures investor returns after some rolling positions are taken into account, will drop 3 percent in the next 12 months, Goldman said in a Jan. 12 report. Precious metals will lose 15 percent, while agriculture will decline 11 percent, the bank said. Industrial metals will decrease 5 percent, livestock 3 percent, and energy will fall 1 percent, Jeffrey Currie, the bank’s head of commodities research, said in the report.

“We are still at below-trend GDP growth, and typically in this environment you see weak commodity returns and low volatility,” Currie said by e-mail Jan. 22. “The expectations are the U.S. grows near trend, but Europe won’t, and the emerging markets won’t. If the growth was above trend everywhere, we’d be jumping into commodities.”

More Supply

While the 18 euro-area nations emerged from the longest recession since they began using the currency 15 years ago, economic growth this year will be just 1 percent, below the annual average of 1.5 percent since 1997, according to 56 economists in a Bloomberg survey. China, the top user of everything from zinc to cotton, will expand 7.5 percent, the slowest pace since 1990, a Bloomberg survey showed.

The S&P GSCI gauge surged 170 percent from the end of 1999 to Dec. 31, 2009, the most of any decade since the data begins in 1971. Higher commodity prices encouraged investment in new production technology and expanded development of farms, oil reserves and mines.

Global refined-copper output this year will jump to 22.2 million metric tons this year, or 55 percent more than in 1999, according to New York-based researcher CPM Group. Last year’s record corn harvest of 13.925 billion bushels in the U.S., the world’s largest grower and exporter, was 48 percent bigger than the harvest 15 years earlier, government data show. World crude- oil output has expanded by 19 percent since 1999, according to the U.S. Energy Information Administration.

‘Back Seat’

The S&P GSCI lagged behind the MSCI equity index for two straight years, the first time that’s occurred since 1998. Commodities will continue to take a “back seat” to other assets because raw-material gains from 2009 to 2011 were “built on unsustainable factors,” Citigroup analysts including Jon Bergtheil and David Wilson said in a Jan. 6 report. Metals have “little encouragement” from the balance of supply and demand this year, they said.

The “super cycle” has ended because supply has caught up with demand, Citigroup said in November 2012. A year later, analysts led by Ed Morse said the bank “remains neutral to bearish commodities” with muted demand expected in 2014.

Producers expanded output, after tight supplies led to a tripling of the S&P GSCI since the end of 1999, with record prices for commodities including oil, gold and copper. More supply led to a divergence of commodity and equity markets that had rallied together since the recession, Goldman’s Currie said.

Bullish Case

JPMorgan Chase & Co. says commodity bears are “overly confident on the reliability of supply” and underestimate demand. All but eight of the 65 commodity indices the bank tracks will gain over the next two years, with five of them posting double-digit annual returns, analysts led by Colin Fenton wrote in a Dec. 30 report. The “super cycle” is “just beyond its midpoint,” and the markets are still in the “bull phases,” JPMorgan said.

The International Monetary Fund raised this year’s global growth forecast to 3.7 percent, from an October estimate of 3.6 percent. The jobless rate in the U.S. fell to a five-year low last month, and Euro-area factory output grew faster than economists forecast in January, according to Markit Economics. The U.S. is the top consumer of corn and crude oil. Europe accounts for about 18 percent of copper demand and 14 percent of global energy use, Barclays and BP Plc data show.

Caterpillar Inc., the largest maker of mining and construction equipment, sees global growth this year at 3 percent, up from 2 percent in 2013, the Peoria, Illinois-based company said in a Jan. 27 statement. That will boost demand for mined commodities and energy, keeping most prices high enough “to make investments attractive,” the company said.

Demand Continues

“Even if we don’t see a sharp rebound in China, emerging markets in general, they are still growing, and that economic growth would bode well for continued demand for food,” said Peter Sorrentino, a senior portfolio manager who helps manage about $4.7 billion at Huntington Asset Advisors in Cincinnati. “As the population becomes more affluent, even in slower growth, diets continue to improve, and demand for higher volumes of food and better quality, that should continue.”

Gold and silver, after plunging last year by the most since 1981, should see “a decent rebound coming” as mines cut back on output, Sorrentino said. “It’s just purely based on physical volumes.”

Bearish Bets

Hedge funds and other large speculators have reduced their net-long holdings to 735,217 futures and options across 18 U.S.-traded commodities as of Jan. 21, compared to the all-time high of 1.56 million, U.S. Commodity Futures Trading Commission data show. Only eight of the 139 funds, including ETFs, in the Lipper Global Commodity group made money last year, according to fund data.

There are “shades of bearishness” across commodities, Morgan Stanley analysts said in a Jan. 17 report. The stronger dollar in 2014 will be a “major problem,” Julien Garran, a London-based analyst at UBS AG, said in a Jan. 20 report. Supply growth also puts prices “at risk,” Deutsche Bank said in a Jan. 14 report.

Investors should stay underweight agriculture, gold and silver this year, Societe Generale SA said in a Jan. 10 report.

West Texas Intermediate crude oil will drop 7.6 percent to $90 a barrel in 12 months, Goldman forecasts. The U.S. is extracting the most oil since 1989 as producers tap shale-rock formations, cutting costs for refiners and driving fuel prices at the pump down 9.8 percent since March.

Total domestic petroleum consumption averaged 18.8 million barrels a day in the four weeks ended Jan. 17, the lowest since Oct. 18., government data show. Global output will rise faster than demand this year and next, the EIA estimates.

Precious Metals

For gold investors, there’s “more pain to come” after prices tumbled 28 percent last year, the most since 1981, Morgan Stanley analysts Peter Richardson and Joel Crane wrote in a report Jan. 22. The bank cut its 2014 target 12 percent to $1,160 an ounce. Goldman sees prices at $1,050 in the next 12 months. Investors lost faith in the metal as a store of value amid a rally in equities and muted inflation. Holdings through exchange-traded products fell 33 percent in the past year, erasing $68.8 billion from the value of the funds.

Copper prices will slump 13 percent to $6,200 a metric ton, Goldman projects. Supplies will top demand by 385,000 tons this year, up from a surplus of 45,000 tons in 2013, the bank said in a Jan. 21 report.

The S&P GSCI Agricultural Index of eight crops fell 22 percent last year, the biggest slump since 1981, as record harvests from India to the U.S. expanded supplies. Corn futures have tumbled 50 percent from a record $8.49 a bushel in August 2012. Worldwide wheat output will be at an all-time high for the fourth time in six years, U.S. government data show.

Global food costs tracked by the United Nations dropped 14 percent from an all-time high in February 2011. J.M. Smucker Co., the Orrville, Ohio-based maker of Folgers coffee, is passing along savings from the lower cost of beans via promotions, Chief Executive Officer Richard Smucker said on a Nov. 20 earnings conference call.

Cost inflation peaked in the six months through Nov. 24 at General Mills Inc., the maker of Cheerios cereal, and the rate will “ease in the second half” of the fiscal year that ends May 31, Chief Executive Officer Kendall J. Powell said on an earnings call Dec. 18.

“There’s adequate inventories in grains and in copper,” said Donald Selkin, who helps manage about $3 billion of assets as chief market strategist at National Securities Corp. in New York. “Crude-oil inventories are going to return to excess once cold weather is done. Commodities should drift lower in an overall sense, absolutely.”

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Banks led by Goldman Sachs Group Inc. and Citigroup Inc. say commodities are heading for losses in 2014 as rising supplies and slowing demand compound slumps that led to bear markets last year in gold, copper and corn.
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Thursday, 30 January 2014 07:05 AM
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