The beauty of
falling commodity prices is in the eye of the beholder as investors wrestle with whether to invest into the slide or invest in some kind of defensive strategy.
Even with crude oil now hovering around $45 a barrel, there is debate over whether it is time to buy or steer clear of the global commodity.
One thing that is certain: Commodity, energy and precious metals have been among the worst-performing categories this year.
Commodity broad basket mutual funds, as tracked by Morningstar Inc., are down 13.7% this year; natural resource funds are down 11.6%; equity limited partnership funds are down 15.5%; and equity precious metals funds are down 23.5%.
Meanwhile, the S&P 500 Index, which was up 1.2% through mid-day trading on Monday, is up 3.4% since the start of the year.
“I'm probably in the minority, but I think you should be a buyer of commodities in this weakness and not a seller,” said Scott Colyer, chief executive of Advisors Asset Management.
“Right now the
global central banks are dramatically easing and targeting inflation, so I think the next move is going to be an increase in demand for commodities,” he added. “Right now, most commodities are priced at a point where they cannot be profitably produced, and that's where you want to start nibbling.”
Mr. Colyer was correct in describing himself as being in the minority as a current commodity bull. On the other side of that trade is somebody lsuch as Michael McGlone, head of U.S. research at ETF Securities.
“The fact that the Fed might be tightening in a potentially deflationary market is what investors should pay attention to,” he said. “Commodity prices are deflating and the implications are that there are virtually no signs of inflation in sight.”
The biggest areas of risk, according to Mr. McGlone, are those economies that are net exporters of commodities, including many emerging markets.
Steven Wruble, chief investment officer at RiskX Investments, cited the pullback in crude oil prices and the surging U.S. dollar as the one-two punch to most global commodities.
“Seems like technicals have had as much of an impact on this as fundamentals, and there seems to be a lot of conversations around speculation right now,” he said. “And it looks like the
September rate hike is now completely off the table.”
Bob Rice, chief investment strategist at Tangent Capital, concurred that the strength of the dollar is a major factor in the sinking direction of commodity prices. But he also believes commodity prices could be shaping as a warning for other asset classes.
“One of the more interesting points is that it's probably hastening the time when you'll see decreasing correlations between asset classes,” he said. “This is having a profound impact on foreign currencies, and a Fed rate hike makes the dollar even stronger at the same time when foreign currencies are under pressure from falling commodity prices.”
Mr. Rice added that investors and financial advisers should be treading lightly across any and all asset classes.
“The macro point is you have to be more discriminating right now,” he said. “This is a kind of wake-up call, and it's not just about commodities.”
As the commodity slump continues to bring down broad swaths of energy-related categories, Todd Rosenbluth, director of mutual fund and ETF research at S&P Capital IQ, said there is still hope for select consumer categories that will benefit from lower commodity prices.
“Consumer staples and consumer discretionary categories are better places to be,” he said. “But there's no free lunch or easy trade in all of this.”
