Gold is the headline commodity for many investors – but in reality its importance has drifted towards the margins these days, still interesting, but more US Tea Party than mainstream.
Of greater importance for the serious investor in Australia are commodities such as iron ore, followed by LNG, then coal.
Gold’s battering is best seen by the 69% slide in the shares of the leading Australian gold miner, Newcrest, over the course of 2013.
Iron ore, coal and LNG don’t feature directly in many of the world’s commodity indexes because they are so hard to track accurately in the absence of public, transparent markets.
But they do in the share prices of BHP Billiton, Woodside, Santos, Rio Tinto, Fortescue, Oil Search and a hots of smaller companies.
Bit it wouldn’t be too much of an exaggeration to say that the outlook for most commodities is on the whole, gloomy – and that’s after three poor years for many investors, not to mention producers.
Weak growth in demand, rising production and a slowing China has meant weak prices and prospects.
Inflation hasn’t happened as a result of the various examples of quantitative easing and record low interest rates in economies around the world.
And inflation won’t be a worry for a year or two to come. So the argument about commodities being one way to hedge against inflation has gone out the door.
Big investors have sold down or exited their commodity investments in the past year – investment funds have cut back, gold and sliver based ETFs have sold billions of dollars of metal.
Of course, the Fed’s decision on the timetable for reducing the level of its expansionary spending on bonds will dominate the immediate outlook for all markets – especially commodities.
That will absorb attention through the New Year and into the first quarter of 2014.
But as of last week, a couple of leading indexes which track commodities were again down for the year so far – by down by around 8% (UBS-Bloomberg) and 9% (Dow Jones UBS).
The S&P 500 Index is 25% in 2013 with only a fortnight or so to go.
This year will mark a third year in a row in which commodities have under performed equities, including 2013.
Another way to look at the fall in commodity prices is the 27% plus drop in Australia’s terms of trade since the peak in 2011 (when the price of coal and iron ore in particular peaked).
Chicago Board of Trade corn futures are down around 37%, Comex silver, 35%, Gold, 26%, (Comex), Coffee (New York), 22%, wheat (CBOT), 18% and sugar (New York), 16%.
Copper, the key industrial metal tracked by funds, is down 9.1% this year, despite the recovery in China since mid year.
Those commodities facing a gain this year include New York oil (around 6% and thanks to the rebound in the past 10 days), US gas, 30% and close to a two year high, orange juice (New York), 26%, cocoa (New York), 24%, cotton (10% in New York).
Except for oil, these commodities are not significant to the global economy.
But it is clear that commodity prices are not reacting positively to the news that 2014 could see reasonable economic growth in China, Europe, Japan and the US.
That should be enough to tell us that the commodity markets are being influenced by other factors – the continuing absence of inflation, for one and expectations interest rates will remain at current record lows in many advanced economies until 2014.
And there’s also lingering investor scepticism that 2014 will be as ‘good’ as many forecasts say it will.
Gold though is the commodity that get’s the punter’s heart a fluttering and there most forecasts are telling us there’s further weakness ahead for the metal in 2014, although the occasional bull still sees the price moving to $US1,400 an ounce in 2014.
For the moment, gold bears rule and looking through the Fed’s tapering decision, UBS Investment Research last week lowered its 2014 average gold price from $US1325 an ounce to $US1,200 an oz.
UBS also lowered its average price expectations for silver from $US25 previously to $US20.50 an oz for 2014 and from $US24 to $US21 in 2015.
Gold ended at $US1,235 an ounce last Friday, silver was on $US19.60 an ounce.
“The more upbeat outlook on the global economy, the reduction of tail risks, and the growing appetite to take on more risk suggests that safe havens like gold will become even more unfashionable up ahead,” said UBS.
“The yellow metal’s performance this year highlights the extent to which gold has lost its allure and implies that it will take a very substantial change in the macro picture for this to be reversed.”
“As 2013 comes to a close, the New Year will likely tempt investors to further move out of safe havens—and especially out of gold—into other assets. Gold has become old news, and investors are likely to be eagerly searching for new places to put their cash to work,” said the analysts.
And, in a research note late last week, analysts at J.P Morgan Cazenove lowered their forecasts on gold – by 10% to $US1,263 for 2014 and by 12% to $US1,275 for 2015. They left their 2014 and 2015 forecast for silver at $US21.38 and $US22, respectively.
They told clients that 2014 will be characterised by tapering and low US inflation, with the downside exacerbated by the re-emergence of producer-price hedging.
The UBS analysts said in their note that; “Our expectation for weaker prices by no means suggests a straight path south."
“The $1200 average forecast reflects the view that the gold market will fluctuate widely as it faces the crosscurrents of an improving macro backdrop, the changing landscape of physical demand and, ultimately, the implications on mine production.”
And while gold is down 26%, some gold mining shares are down 60% or more – Barrick, Newmont and Newcrest for example.
And while all forecasts for equities are bullish (the ASX 200 is forecast to claim the range of 5,800 to 5,900 in some early forecasts for 2014), it might pay to maintain a sceptical stance.
As yourself why Australia will ‘enjoy’ the worst December in 40 years, if the local market continues to perform as it has done for December so far.
As if Friday’s close the ASX 200 was down 4.17% (after Friday’s 0.7% rise) and more than 6% from the start of November.
If the current fall is maintained at Friday’s level, it will be the worst December since 1974 (and the madness of the Whitlam years).
2013’s performance will be closer to 6% rather than 15%, as it looked a couple of months ago.
What’s not to say that the December trading won’t become the new ‘norm’ for 2014 while we see if the economy can sort itself out, survive the Federal budget, and maintain its already weak level of growth?
