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Portfolio > Alternative Investments > Commodities

Is the Commodities Bull Run Over?

By Gil Weinreich

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Last month’s attention-grabbing IPO for Glencore (LON: GLEN) valued the commodities giant at $59 billion. Oh, how the mighty have fallen.

The Swiss holding company that mushroomed in size in the years leading up to its vaunted public offering, released its first earnings report last Tuesday, falling short of analyst expectations. It is now worth $32 billion. The company tried to sound upbeat about its prospects, but cited concerns about slackening demand in countries like China. The Asian giant has been a voracious Pac-Man as far as commodities demand is concerned, so the worry is well placed.

The Glencore news coincided with release of the BofA Merrill Lynch Global Fund Managers Survey, which showed that professional investors view gold as more overvalued than at any time since December 2009; 37% of managers see the yellow metal as overvalued.

Meanwhile the market rout in commodities gathered pace in the past few days as fears of a Greek default pushed up the dollar. Since commodities are priced in dollars, they automatically become costlier to emerging markets buyers using other currencies.

The New York Fed’s manufacturing index, which went from a weak reading of 12 in May to a negative 7.8 in June (indicating a shrinking sector), also rattled commodities markets.

Whether the slew of negative reports will continue is anybody’s guess, of course. But if it turns out that commodities have peaked, while it would bring pain to a bandwagon of investors, it could prove to be very good news for the economy overall. It could mean consumers will spend again, confidence in the economy will increase and employers will resume hiring.

As Milken Institute economist Ross DeVol told Advisor One in a previous interview, the economic expansion that seemed so promising earlier this year was derailed primarily as a result of the surge in oil prices resulting from unrest in Arab oil-producing countries. If oil prices continue to decline, we can expect an increase in consumer spending, business investment and job creation.

And as SoGen analyst Dylan Grice has shown, the expected return of commodities over time should be close to zero. With the long run-up investors have enjoyed, it may be time for an overdue sector rotation out of commodities. At least that’s what professional investors in BofA Merrill’s June report seem to be sensing.

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