Real Assets Have Been in Real Trouble. Does This End the 'Commodity Supercycle'?


NEW YORK (MainStreet) — Real assets have been in real trouble lately. Commodities prices, particularly popular precious metals, have been sinking fast. Counter to common expectations, "safe havens" such as gold have been particularly disappointing. Precious metals weren't so precious in September, falling 5.63%.

"Markets were choppy during the summer amid speculation that the Federal Reserve would begin the process of slowly tightening its monetary policies," says Christopher Burton, senior portfolio manager for the Credit Suisse Total Commodity Return Strategy. "Removal of this risk in the near term may be accommodative of risk appetite and further aid the economic recovery. It may also increase already heightened risks of inflation eventually overshooting expectations. Commodities have been increasingly driven by commodity specific factors, helping to lead to reduced correlations. We continue to expect commodities to provide valuable diversification benefits amid heightened periods of uncertainty."

The Dow Jones-UBS Commodity Index Total Return lost 2.55% in September as 12 out of 22 index components posted negative returns:

  • Energy declined 4.31%, with every segment of the sector lower. Natural gas prices fell as analysts say mild weather resulted in weaker-than-expected demand. Libya's crude oil production recovered to nearly 40% of its prewar capacity, while fading worries over tensions in Syria and Iran helped ease risks to crude oil supplies from the Middle East, lowering oil prices.
  • Agriculture decreased 1.94%. Corn, soybeans and soybean products declined amid favorable crop weather as the growing season transitioned to harvest. Livestock was the best performing sector, up 1.70%.
  • Industrial Metals increased 1.57%. The Federal Reserve's surprise decision to leave its bond-buying program intact gave support to base metal prices. Chinese industrial profits were reported to be up sharply for August compared with the prior month and year, which boosted demand expectations.

With the commodities index basically flat for the year to date and gold heading for its first annual loss in 13 years, should investors still consider commodities as a sweetener to their portfolio performance? Nicholas J. Johnson and Greg E. Sharenow, portfolio managers for Pimco, believe so. They say that the future of commodity returns doesn't look that much different than the past.

"From the late 1990s until the 2008 financial crisis, most commodities experienced double-digit annual real (i.e., inflation-adjusted) price growth, a period known as the commodity 'supercycle,'" Johnson and Sharenow wrote in a recent analysis. "While we agree that commodity price appreciation won't likely mirror the supercycle, we do not believe this should necessarily imply a negative view on commodity returns going forward. Overall, while the supercycle may be dead, the outlook for commodity returns today seems broadly consistent with historical returns, and commodities remain an important tool for hedging inflation risk."

— By Hal M. Bundrick for MainStreet

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