Commodities Outlook for 2014

Commodities are unlikely to find any friends in 2014, with the exception of the ever-resilient gold 'bugs'

Andy Brunner 12 December, 2013 | 2:46PM
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Are there any signs of improvement for 2014?

Following another difficult year of sizeable losses, the commodity sector remains virtually friendless going into 2014. Oversupply has become an increasingly serious issue for a number of commodities, especially industrial metals and, for the two main metals, aluminium and copper, this is expected to undermine pricing through 2014. The average year-end copper price forecast from the main investment houses we monitor is $6,750/tonne, some 5% below current spot price.

In the oil markets, ever increasing North America oil production is beginning to have a global supply effect as the shale revolution continues, while geopolitical risks have eased in Iran and Iraq and Libya is raising production even as emerging market demand has downshifted. Forecasts for both Brent crude and WTI suggest a relatively flat/slightly lower outcome for 2014 but risks appear to the downside.

In agriculture, following a good harvest this year and higher plantings expected in 2014, further price weakness seems likely for grains. Forecasts from the main investment houses indicate corn prices will fall again in 2014, although much will depend on the vagaries of the weather.

The love affair with gold appears well and truly over. Anyone buying it in the last 2.5 years is now well underwater and the S&P 500 has outperformed by 150% since 2011. None of the “safe haven” reasons advanced in recent years for buying the metal (inflation, a dollar crash, economic/financial collapse) have come to pass and—if the consensus view on the global macro-backdrop prevails—further weakness is probable and far superior diversification options are available that at least offer income. For true gold “bugs”, however, nothing else will do as insurance against disaster. Interestingly, the average gold price estimate by the investment houses monitored is for $1,250/oz, close to the current spot price.

If the fundamentals are somewhat suspect then presumably so are the technicals?

A decade long rally has petered out and many institutions, investment houses and hedge funds are abandoning commodity investment. In the current environment even traders and speculators have lost money with commodity hedge funds, on average, losing some 4% this year. The days of the super-cycle are over and there is no place for one-way, long-only positioning by investors. It is an asset class best left to the specialists, yet even they are having real trouble producing positive returns.

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About Author

Andy Brunner

Andy Brunner  is Head of Investment Strategy, Morningstar UK