- Broad commodities market has been trending higher this year
- China, the second largest economy in the world, has been buying less from the global markets
- A number of inverse ETFs hedge against falling commodities
The commodities group and related exchange traded funds have rallied since the January lows. However, fundamental pressures still remain and could drag the asset class to new lows.
The broad commodities market has been trending higher this year. Since the January 20 low, the PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC) rose 12.7%, iPath Dow Jones-UBS Commodity Index Total Return ETN (NYSEArca: DJP) increased 9.7% and iShares GSCI Commodity-Indexed Trust (NYSEArca: GSG) gained 14.4%.
However, Goldman Sachs Group argues that any increase in raw materials prices will push producers to dump more supply onto the market, which will impede any sustainable advance in prices, reports Pratish Narayanan for Bloomberg.
“Higher prices are much harder to sustain in a supply-driven market since supply is primed to return with higher prices,” the analysts wrote in a report. “But this lesson will likely only be learned through false starts.”
The recent move higher is “definitely a head fake,” Boris Schlossberg of BK Asset Management told CNBC, arguing that for most commodities, strong supply and low demand remain intact.
Providing a window into the low demand for raw materials, China, the second largest economy in the world, has been buying less from the global markets. On Tuesday, China revealed imports declined 13.8% last month, compared to a 18.8% drop in January, reports Mark Magnier for the Wall Street Journal.
Schlossberg attributes the recent strength in commodities to “a massive amount of short covering.”
BlackRock senior director Ewen Cameron Watt also argues that the bounce in oil prices was also due to a period of “short-covering,” reports Jessica Hartogs for CNBC.
If commodity traders fear that the weak fundamentals will eventually catch up, there are a number of inverse ETFs that hedge against falling commodities. For instance, the DB Commodity Short ETN (NYSEArca: DDP) takes the simple short position on a group of diversified commodities.
The DB Commodity Double Short ETN (NYSEArca: DEE) takes the two times the inverse position on a basket of commodities. The ProShares UltraShort Bloomberg Commodity (NYSEArca: CMD) also takes the daily -2x or -200% performance of the Bloomberg Commodity Index.
PowerShares DB Commodity Index Tracking Fund