As an asset class, commodities have been drubbed this year. The average year-to-date loss for the SPDR Gold Shares (NYSEArca: GLD), iShares Silver Trust (NYSEArca: SLV) and the United States Oil Fund (NYSEArca: USO) is north of 14%.
In just the past 90 days, SLV has tumbled 10.5% while USO has plunged nearly 29%. Sixteen commodities ETFs hit 52-week lows last Friday and that number does include countless currency and single-country funds that have deep commodities exposure. Those facts and others underscore acute weakness commodities markets. They could also be a sign that now is the time to take a contrarian view of commodities and the related ETFs.
“The consensus view is that there is no rush to buy because commodity prices will be ‘lower for longer.’ Reduced production costs are cutting break-even prices, and demand is being dampened by slowing economic growth in China and much of the rest of the formerly commodity-hungry developing world,” reports Andrew Barry for Barron’s.
Of course, the strong dollar is a thorn in the side of commodities, which are dollar-denominated. Not to mention the other headwinds facing marquee commodities, such as gold and silver. Silver, like gold, is losing ground among investors seeking a hedge against market volatility or a store of value against inflationary pressures, reports Christian Berthelsen for the Wall Street Journal. Many market participants are anticipating the Federal Reserve to hike interest rates for the first time in almost a decade, which will diminish the attractiveness of holding assets with no yields.
Barclays analysts project silver prices will continue to decline 20% in the coming year. Bearish bets have already increased fivefold since May by one measure. [Trouble for Silver ETFs]
There is some seasonal help for gold, but that is tough to bank on with bullion being battered in the fashion it has been. As ETF Trends reported on Wednesday, seasonal factors could bring some upside for GLD this month. In August, gold has finished in positive for four of the past five years. Gold has also produced a 6% average return over the past five years. Additionally, miners also generated outsized returns during August after recovering from a July sell-off. [August Sector Ideas]
The good news is, as Goldman Sachs points out to Barron’s, that this is the bottom of the commodities cycle. Buying opportunities at cycle bottoms do not come along very often.
iShares Silver Trust
