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Why Commodities On Cusp Of Supercycle

Sumit Roy
Maxwell Gold

Maxwell Gold is director of investment strategy and research at ETF Securities, an issuer focused on commodity and currency exchange-traded funds, including the ETFS Bloomberg All Commodity Strategy K-1 Free ETF (BCI). ETF.com recently spoke with Gold to discuss the latest outlook for commodities, including his view that the asset class may be on the cusp of another supercycle.

ETF.com: You’ve mentioned we could be at the beginning of a commodities supercycle. Would you elaborate?

Maxwell Gold: The commodity market tends to move in much longer periods than a traditional business or market cycle that stocks typically move in, or even a typical economic cycle, which historically has been about five to seven years. Commodity cycles are usually about 10 to 15 years long.

We had a sell-off and an oversupply of commodities for the past several years. The turning point was 2016. Since then, we've been seeing a drawdown of the supply glut, as well as a reduction of output due to reduced capital investment and more supply discipline from a lot of producers, especially in the energy and mining sectors.

ETF.com: How long will this supercycle last, and how much can commodities rally from here?

Gold: It depends on a lot of factors that we just don't know right now. The important takeaway is that we're at the very early stage of this. Certainly, there's more rebalancing needed in terms of drawing down on existing supply. But we're beginning to move back into balance in certain commodities and the fundamentals are becoming much more attractive.

Over the next couple of years, commodities will be an area where we'll begin to see a lot of improvement fundamentally, including a better macroeconomic backdrop with rising growth and rising inflation.

From an investment standpoint, investors will begin to look towards the asset class more favorably. They’ve been absent for the past few years, ever since that large drawdown in 2013/2014.

ETF.com: When a lot of investors see the economy doing well, they tend to gravitate toward equities. But you’ve mentioned commodities could do even better than stocks at this point in the cycle. Why is that?

Gold: We typically see commodities outperform stocks and other risk assets in the late stages of a business cycle. Right when we're beginning to see capacity overshoot and we hit a slowdown in equity markets, commodities perform better.

The Fed and other central banks want to increase interest rates to slow down and control economic growth to prevent the economy from overheating too much. That typically goes hand in hand with a period where there's increased demand for inputs, raw materials and resources―primarily commodities.

It's very typical to see commodity prices increase when we’re in a rate-hiking cycle and interest rates are rising.

ETF.com: A lot of times when commodities rise in price, investors aren’t able to participate fully in those gains because of contango and the costs from rolling futures positions. Do you think roll costs will be a drag on returns this year?

Gold: I don't think they will. A lot of the key commodities out there are moving into backwardation. That's due to the tightening of the supply glut we've been dealing with and the continued drawdown of inventories for commodities in the metals and energy space.

Going forward, roll yields will actually result in positive returns, whereas they’ve been a drag on returns in recent years. We've begun to see that a little bit last year, and we're continuing to see it this year.

That’s an important point. Even if we don't see outsized price increases in commodities, from a total return perspective, commodity returns will benefit from a change to positive roll yields based on the reshaping and structuring of the fundamental market in commodities.



ETF.com: What types of indices should investors looking to buy commodities broadly focus on?

Gold: You want to try to get as broad-based diversified exposure to the commodity sector as possible. Look at indices such as the Bloomberg Commodity Index, which is the most diversified by sector commodity index out there.

It caps any one sector weight at one-third. It also has an economic weighting. It's not just looking at market cap or tradability of commodity contracts, it's also looking at the economic significance of those commodities.

ETF.com: Are there any specific commodities that you see outperforming?

Gold: Metals will continue to perform strongly. Within those, copper has a continued tail wind behind it given the global growth of emerging markets and developed markets, the potential for increased investment in infrastructure, as well as a reduction of mining and capex on the supply side.

Additionally, precious metals could push even higher this year. Gold, silver and platinum could have the potential to outperform if we get either geopolitical volatility or a slowdown in equity markets.

Follow Sumit Roy on Twitter @sumitroy2

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