Ongoing global risks could continue to drag on commodity markets and related exchange traded funds, but it may leave opportunities to jump into some commodities, notably precious metals.
On the recent webcast, The Global Economy: Divergence, Commodities and the Dollar, Helen Henton, director commodities at Roubini Global Economics, points out that global economies still face some significant headwinds, notably commodity exporters in the emerging markets, with Latin America expected to be the weakest region in 2016 and Brazil remaining in recession.
Consequently, Henton expects some painful supply adjustments before prices are able to stabilize, even after the significant declines in industrial metals and soft commodities this year.
Additionally, disinflation is intensifying as many global central banks engage in loose monetary policies, but the low inflation will also enable the Federal Reserve to hike interest rates slowly. The diverging monetary policies would suggests a stronger U.S. dollar, Henton added.
While a stronger dollar, disinflation and potential weakness overseas could continue to pressure commodities, Mike McGlone, head of U.S. research at ETF Securities, argues things are looking better for some commodities.
For instance, McGlone believes key gold bearish factors may be ending, including Fed tightening expectations, above average stock returns and low volatility, among others. Gold futures may also be pointing to a bottom as the market has moved to backwardation – later dated contracts are cheaper than the spot price, which suggests that there is excess demand or constrained supply, and open interest jumped in 2015.
“Gold, silver, platinum and palladium appear to have bottomed,” McGlone said. “The Fed tightening consensus is at risk of a similar fate as the 2014 consensus of higher bond rates and increasing commodity prices.”
The ETFS Physical Swiss Gold Shares (NYSEArca: SGOL) has increased 5.5% over the past three-months but is still down 2.5% year-to-date, with Comex gold futures trading around $1,147 per ounce.
Additionally, the strategist contends that many other precious metals demand indicators have increased sharply. Silver, platinum and palladium have greater industrial applications, which may support the precious metals. McGlone points out that platinum and palladium see huge demand for vehicle emission controls, notably among emerging markets where a rising middle class are increasing discretionary spending.
“Technology is generally a demand factor for precious metals,” McGlone said. ‘Technological innovation and demographic changes are driving an energy paradigm shift.”
For instance, the ongoing shift toward alternative and renewable energy sources, like solar, would bolster silver demand as the precious metal is a component in photovoltaic panels.
Over the past three-months, the ETFS Physical Silver Shares (NYSEArca: SIVR) rose 8.8%, ETFS Physical Palladium Shares (NYSEArca: PALL) gained 9.2% and ETFS Physical Platinum Shares (NYSEArca: PPLT) added 1.2%. However, the metals are still underperforming this year, with SIVR up 1.8%, PALL 15.3% lower and PPLT down 17.6% year-to-date.
“Precious metals appear under priced and offer attractive investment and diversification attributes, notably in a basket,” McGlone added.
Investors who want a more diversified approach to precious metals can also take a look at the ETFS Physical Precious Metals Basket Shares (NYSEArca: GLTR) and ETFS Physical White Metals Basket Share (NYSEArca: WITE). Year-to-date, GLTR is down 3.7% and WITE is 8.4% lower.
GLTR tracks the four precious metals, including gold 57.9%, silver 28.8%, palladium 6.8% and platinum 6.6%. WITE, on the other hand, only focuses on the white metals, including silver 50.7%, platinum 31.8% and palladium 17.5%.
Financial advisors who are interested in learning more about investing in commodities and precious metals can listen to the webcast here on demand.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.