There's gold in them thar commodities

Growing emerging-markets economies are adding fuel to price upswing

Nov 1, 2009 @ 12:01 am

By Jeff Benjamin

The secular bull market in commodities, which took a breather during the stock market downturn last year, is back on track and poised for an extended rally, according to money managers and market watchers. “The real move in commodities hasn't even been established yet, and that's why it's important to get a foothold now,” said Sam Jones, president of All Season Financial Advisors Inc. While some analysts have focused on commodities as a traditional, and legitimate, hedge against a weak U.S. dollar, others see a bigger picture emerging in the growing imbalance between global supply and demand. “There's clearly more going on here than just a weak dollar,” said Thomas Samuelson, chief investment officer at Advanced Equities Asset Management.
Mr. Samuelson, whose firm manages more than $500 million, cites the pace of economic growth in emerging and developing nations as examples of how demand for commodities will continue to drive up prices, regardless of what happens with the U.S. economy. Market watchers have focused on the recent cycle of raw commodities prices as evidence of a changing paradigm: Fast-growing emerging economies now represent a larger collective gross domestic product, at $16 trillion, than do the United States ($14 trillion) or the eurozone ($13.5 trillion). “I totally think the real rally in commodities could be demand-driven,” said Charl Malan, who is part of a team managing $1.7 billion in two commodities funds at Van Eck Global. As a broad category, tracked by the PowerShares DB Commodity Index Tracking Fund (DBC), commodities gained 10.7% this year through last Wednesday. The S&P 500 gained 15.3% over the same period. Some commodities that are already outperforming the broad equity markets include crude oil, which is up 19.2% this year, gold, up 16.4%, and silver, which has gained 41.6%. With the exception of gold, which many analysts say trades more like a financial instrument than a commodity, the broader commodities asset class is still well below its July 2008 peak. “With ETFs, there are enough ways to buy the raw commodities, and the smart guys aren't buying shares in commodity companies right now,” said Mr. Jones, who manages $115 million at All Season Financial Advisors. “I find raw oil to be far more attractive than any oil services company,” he added. “I think the raw commodity groups are going to catch up to the prices of the shares of the commodity companies.” By Mr. Malan's assessment, most of the run-up in raw commodities over the past few weeks has been driven by the weak U.S. dollar, not demand, which remains a source of untapped growth. “People should think about commodities in a way that equates the demand to the post-World War II environment, when there was tremendous demand in Europe and Asia,” he said. “Think of the massive amount of commodity-intense spending that is being led by China, which is already close to the second-biggest economy in the world.” It is not unusual for strength in commodities to follow fixed in-come and then equities as part of an economic recovery. But some market watchers are citing the current commodity dislocation as evidence that raw materials in general are riding on a separate supply-and-demand track. “Crude oil usually bottoms after a recession ends, but his time it bottomed in December, while the stock market hit its low in March,” Mr. Samuelson said. “The cycle is different this time because emerging market demand is alive and well.” Even with the bullish outlook, money managers suggest a careful and deliberate approach to commodity investing. Mr. Jones recommends gradually building up an allocation to commodities that is limited to less than 10% of an overall portfolio. “Slowly is the prudent way to do it,” he said. “Commodities can be very volatile and they can ruin your day.” Mr. Samuelson, who considers commodities a part of a core asset allocation strategy, also advises a cautious approach. “There will always be shorter-term ups and downs,” he said. One way to smooth that volatility, he added, is to invest in the currencies of the commodity-rich countries. “Foreign currencies have a direct correlation to commodities,” Mr. Samuelson said. “As the price of the commodities goes up, the country's fiscal structure improves and that strengthens the perception of their currency.” E-mail Jeff Benjamin at jbenjamin@investmentnews.com.

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