Near the beginning of every year, we update and publish what can safely be called our most popular piece: the Periodic Table of Commodities Returns.
Below are the latest year-end results, which show the historical performance of commodities from best to worst. A larger, high-definition version of the table is available for download.
Last year we experienced one of the biggest commodity corrections in recent memory—the biggest since 1986, in fact—and we’re happy to put it in our rearview mirrors.
Base Metals Boasted Mettle
Although it came in second overall, right behind palladium, nickel was the real standout of 2014. With a shabby 10-year annualized track record of -1.8 percent, the metal gained nearly 7 percent on the back of supply scares after Indonesia, the world’s largest producer, unexpectedly banned all nickel exports last January to meet domestic demand. By May, the metal had rocketed up more than 50 percent before cooling to 37 percent in July, when it was then the best-performing commodity.
Aluminum also managed to beat its 10-year annualized performance by close to 3 percentage points, owing to global production cuts and increased industrial usage of the metal in automobiles and aeronautics. The 2015 F-150, for example, is the first mass-produced truck in its class to feature an aluminum-alloy body. Because of these developments, Texas-based aluminum-producer Alcoa, which we own in our Global Resources Fund (PSPFX), enjoyed its best year since 2008, delivering 50 percent.
Precious Metals Pressured
Palladium, 2014’s top commodity, performed relatively according to script. For the year it was up 11.35 percent, compared to its 10-year annualized returns of 14 percent. Much like nickel, palladium was spurred by extenuating circumstances. Between January and June, a labor strike in South Africa, the world’s second-largest producer of the metal following Russia, halted production, which depleted reserves and sent palladium to a three-year high of $850 an ounce.
Although nickel doesn’t have an exchange-traded fund (ETF), we manage to capture growth through a palladium ETF.
The South African labor strike, however, didn’t seem to help palladium’s sister metal, platinum, which ended the year down 11.79 percent. To combat and find solutions to years’ worth of flat sales, six South African platinum producers launched the World Platinum Investment Council in December. CEO Paul Wilson summed up the group’s mission:
To date, the investment potential of platinum has been largely overlooked. We believe that presenting the platinum investment proposition to a wider range of investors will result in it rightfully being considered favorably as an investment.
Silver had its second straight down year, falling 19 percent, despite record sales of Silver Eagle coins. According to the U.S. Mint, 44 million ounces were sold in 2014, outpacing Gold Eagle sales by 59 percent. The U.S. Mint’s stock of bullion completely dried up on Christmas Eve.
However, silver mining also accelerated to record highs last year. This, coupled with weak industrial use of silver in the first half of 2014, led to falling prices.
And then there’s gold, which also fell (slightly) for the second consecutive year. As I’ve already reported, even though the yellow metal dropped 1.72, it still remained a more reliable form of currency than any other globally, excluding the U.S. dollar.
Energy Feeling Sluggish
Besides crude oil, the biggest loser was natural gas. A particularly brutal winter in late 2013 helped make it the top performer for that year. But even though the polar vortex—remember that?—dragged frigid temperatures into the beginning of the new year, natural gas couldn’t quite manage to ignite the flame in 2014, which turned out to be one of the warmest years on record.
Natural gas remains the worst-performing commodity for the 10-year period, down 3.73 percent.
All three energy-related commodities—coal, natural gas and crude oil—showed up in the bottom five, their first time to do so since 2006.
Weighed down by crude oil, which tanked 46 percent in 2014, the energy component of the S&P Goldman Sachs Commodities Index (GSCI) lost 44 percent for the year.
By all accounts, crude oil’s collapse was both unexpected and swift—and it looks as if the bottom has not yet been reached. Goldman Sachs recently reduced its six- and 12-month West Texas Intermediate (WTI) crude forecasts to $39 per barrel.
It’s disconcerting to recall that as recently as July, Brent oil set a record for trading between $107 and $112 per barrel for 12 consecutive months. It now trades for less than half that, at approximately $50 per barrel.
The selloff is so extended now that crude’s weekly relative strength index (RSI) is at 8.5, which is even lower than its RSI during the 2008-2009 crisis.
Where’s the Global Demand?
In response to unraveling crude prices, several companies, from the small caps to the majors, announced they would be laying off workers in huge numbers. Schlumberger, the world’s largest oilfield-services company, will reportedly be letting go of 9,000 of its workers, or 7 percent of its workforce; Suncor Energy, Canada’s largest, will cut 1,000 members of its staff and slashed $1 billion in capital spending.
Many more companies have had no other choice than to cut costs by halting exploration and production. The U.S. oil rig count saw its largest one-week drop in six years, losing 74 this week alone. As disconcerting as all this might sound—especially the job losses—these decisions are necessary to rebalance supply and demand and stabilize prices.
After peaking at $10 per 1,000 cubic feet in 2008, prices for natural gas—remember, it’s the worst-performing commodity of the last 10 years—plummeted and never fully recovered, which is why you see a gradually diminishing number of gas rigs in the chart below.
When the shale oil revolution began in 2009, the number of rigs steeply ramped up, adding approximately 200 new rigs each year. And not just any rigs, but much more efficient, technologically-advanced pieces of machinery, capable of extracting crude from places that until now were inaccessible.
That’s what American ingenuity has given the world: cheap oil and cheap fuel. Speaking on CNBC this week, Nobel Prize-winning economist Robert Shiller praised the U.S.’s drive and innovative spirit: “This country is proud of our oil technology and it’s been boosting our spirit, our animal spirits.”
But just as the U.S. has provided the world with plentiful oil, the rest of the global economy has cooled, especially Europe, choking demand.
“The global economy today is much larger than what it used to be,” World Bank Chief Economist Kaushik Basu recently stated, “so it’s a case of a larger train being pulled by a single engine, the American one.”
Tough Times Don’t Last Forever
Speaking to Fox Business on Monday, PSPFX portfolio manager Brian Hicks explained where we continue to see opportunity and value in this low-price environment:
Certainly the [oil] selloff is getting long in the tooth and we're actually becoming more and more constructive as [it] continues... These prices are not sustainable [and] not high enough to replace production going down a few years from now. We think the stocks look very attractive here, and if you look at their performance to crude oil, they've actually been outperforming since mid-December.
Michael Waring, CEO and Chief Investment Officer of Toronto-based Galileo Global Equity Advisors, visited our office this week and reminded our team of the cyclical nature of the energy sector. We’ve been through similar downturns in crude oil, Michael noted—in 1986 and 2008-2009, most recently.
“I’ve seen this movie so many times, I already know the ending,” Michael said, suggesting that oil has tended to move back to its mean eventually.
The chart below shows the inverse relationship between crude and the dollar, going back to 1984. The current standard deviation spread between the two is clearly widening to 1985 and 2008-2009 levels. But as strong as the dollar or as depressed as oil got, both eventually reverted back to their means.
For the past 30 years, the 12-month rolling sigma or volatility for oil, 70 percent of the time, is ±30 percent; the dollar’s is ±9 percent. Today the odds are high that the dollar will correct and oil will rise. In 30 years, this is the third-widest gap between oil falling and dollar rising. But if you look over the same 30 years, you’ll see that oil has historically bottomed in February and subsequently rallied.
I cannot stress enough how greatly low gasoline prices have benefited consumers. They might also contribute to non-oil-services employment. According to BCA Research:
In the U.S., the decline in gasoline prices should boost household disposable incomes by around $150 billion this year, with an additional $30 billion coming from lower heating bills [and] decreased airline fares... The money spent, in turn, will generate additional demand for goods and services. This will lead to faster employment growth, translating into more income and spending.
- Even with a strong rally on Friday, major market indices finished lower this week. The Dow Jones Industrial Average fell 1.27 percent. The S&P 500 Stock Index dropped 1.24 percent, while the Nasdaq Composite declined 1.48 percent. The Russell 2000 small capitalization index fell 0.76 percent this week.
- The Hang Seng Composite rose 0.01 percent; Taiwan fell 0.84 percent and the KOSPI declined 1.90 percent.
- The 10-year Treasury bond yield fell 12 basis points to 1.83 percent.
Domestic Equity Market
The S&P 500 pulled back 1.24 percent in a volatile week. Financial stocks came under pressure as earnings season began, with large financial companies among the earliest to report. The market was disappointed by fourth-quarter trading results that came in below expectations.
- Utility stocks resumed leadership this week as bond yields dropped and defensive areas outperformed. It was a broad-based, macro-driven rally for the entire sector.
- The telecommunication services sector was also a beneficiary of a weak market in which defensive, non-cyclicals outperformed.
- GameStop was the best performing company this week, rising 12.64 percent. The company reaffirmed its earnings forecast for the fourth quarter and full-year 2015, reassuring investors.
- The financial sector was the worst performer this week as Bank of America, Citigroup, JP Morgan and Goldman Sachs all disappointed the market with earnings.
- The technology sector also underperformed this week as data-storage chip makers came under pressure after SanDisk reported preliminary quarterly revenue that was below expectations. This news also dragged down Micron Technology and Western Digital. Apple was among the worst performers this week as well, falling by more than 5 percent in what appeared to be general market skittishness.
- The worst performing company this week was SanDisk, which fell 18.67 percent. The company reported preliminary quarterly revenue that was below expectations as mentioned above, driven specifically by weakness in mobile data-storage memory chips for tablets and smartphones.
- After outperforming in 2014, defensive stocks may be poised to continue that outperformance. The Federal Reserve appears intent on normalizing monetary policy and the bond market is responding by sending long-term yields lower. This implies that the market believes a tighter Fed policy will materially slow the economy.
- Earnings season will kick into high gear next week with some key companies to watch including Johnson & Johnson, Starbucks and General Electric.
- If oil can find a bottom and move higher, small and mid-cap energy stocks would be among the first beneficiaries.
- The rally in U.S. energy producers may be short lived as OPEC countries seem to be acting individually rather than as a collective cartel, making predictions of future actions more difficult. This could be positive, however, for the inverse-beneficiary companies in sectors such as airlines and consumer discretionary.
- The European Central Bank (ECB) is widely expected to announce a substantial quantitative easing (QE) program next week. If the ECB fails to follow through in meeting these lofty expectations the market could sell off.
- Earnings season got off to a rough start this week with large-cap financials disappointing and the market reacting accordingly. If the market is looking for an excuse after such steady performance over the past year, a lackluster earnings season may be the catalyst for that 10-percent correction it’s been bracing for, but that has not materialized for more than two years now.
U.S.U.S. Treasury bonds rallied strongly this week, sending yields lower across the curve. Earlier in the week Treasury yields were moving lower, as the equity posted five consecutive days of losses beginning last Friday paired with a risk-off feel to the financial markets. The real fireworks occurred on Thursday, when the Swiss National Bank (SNB) scrapped its exchange-rate cap with the euro, causing significant volatility in the foreign exchange markets. This action by the SNB increased investors’ confidence that the ECB would implement quantitative easing (QE) next week, further pressuring yields in Europe and making U.S. fixed income one of the best relative values in the world.
- A combination of the European Court of Justice backing the legality of the ECB buying sovereign bonds along with the removal of the currency cap by the SNB led to a big rally in the U.S. fixed-income markets this week.
- Consumer prices fell 0.4 percent in December, reinforcing the idea that inflation is very low, inflation expectations are very low and bond yields may stay low for even longer.
- The January University of Michigan Consumer Confidence survey rose to the highest level since January 2004, with sentiment improving for both the current situation as well as for future prospects.
- December retail sales fell 0.9 percent, much worse than expected and ultimately raising questions about the strength of the consumer.
- Industrial production fell 0.1 percent in December, in line with expectations but still negative.
- Copper fell to a five-year low this week, implying weakness in global industrial-manufacturing activity.
- The European Central Bank meets on January 22 and needs to show the market it is willing to act on implementing an aggressive form of QE.
- Housing starts and building permits for December will be released next week. After cautious comments from the homebuilders this week, this could be another sign that housing has stalled and will not be a positive catalyst for the economy any time soon.
- Municipal bonds continue to look like an attractive alternative in the broad, fixed-income universe.
- Greece is generating negative headlines again, and while this appears to be an isolated political event, it does reinforce the idea of the potentially fragile nature of the euro currency. Greek elections are Sunday, January 25.
- Oil prices look extremely oversold and even a bounce in oil could change the mood in the market, with bonds selling off in reaction.
- The Federal Reserve’s next meeting is January 28 and a continued hawkish tone could spook the market.
Gold Surges on Currency Volatility
Gold and gold stocks are on the move after the surprise move from the Swiss National bank to remove its currency cap versus the euro this week. This highlights gold’s valuable role as a store of value when currency volatility destroys purchasing power as it has in many parts of the world over the past year.
As you can see in the chart below, gold in euros has rocketed higher.
Similar moves can be witnessed in other countries’ currencies as well, such as the South African rand, the Japanese yen and the Canadian dollar.
For the week, spot gold closed at $1,278.85 up $56.33 per ounce, or 4.61 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, gained 6.93 percent. The U.S. Trade-Weighted Dollar Index gained 0.77 percent for the week.
|Jan 15||U.S. PPI final Demand YoY||1.00%||1.10%||1.40%|
|Jan 15||U.S. Initial Jobless Claims||290K||316K||294K|
|Jan 16||German CPI YoY||0.20%||0.20%||0.20%|
|Jan 16||Euro CPI core YoY||0.80%||0.70%||0.80%|
|Jan 16||U.S. CPI YoY||0.70%||0.80%||1.30%|
|Jan 19||China Retail Sales YoY||11.70%||-||11.70%|
|Jan 20||German ZEW Survey Current Situation||13||-||10|
|Jan 20||German ZEW Survey Expectations||40||-||34.9|
|Jan 21||U.S. Housing Starts||1040K||-||1028k|
|Jan 22||Euro ECB Main Refinancing Rate||0.05%||-||0.05%|
|Jan 22||HSBC China Manufacturing PMI||49.5||-||49.6|
- Gold traders are bullish for the seventh week in a row, citing the potential for stimulus in Europe along with speculation that the Federal Reserve will move slowly on raising rates. Moreover, one trader made a huge bullish bet earlier in the week by purchasing 40,000 March 2015 SPDR Gold Shares ETF calls worth upwards of $10 million.
- The Swiss National Bank’s surprise move to abandon the franc’s cap against the euro currency sent investors flocking to gold as a safe haven from currency swings. The SPDR Gold Shares ETF, the largest of the physically-backed ETFs, saw an inflow of almost 10 tonnes on Thursday, the largest single-day inflow since August 2012.
- The World Gold Council signed a memorandum of understanding with the Shanghai Gold Exchange on a comprehensive strategic gold cooperation agreement. This further marks the shift in the gold market from West to East, as the expansion of strong gold trading hubs in Asia will improve price discovery, liquidity, transparency and efficiency. The agreement underpins the development of gold investment products within the Shanghai Free Trade Zone and the international trading of gold in the Chinese renminbi currency.
- Goldcorp announced it will take an impairment charge of up to $2.7 billion on its new Cerro Negro mine in Argentina. The company said this resulted from restrictions on importing goods and services into the country, converting Argentine pesos into U.S. dollars and high inflation.
- U.S. retail sales fell the most in nearly a year last month, fueling speculation of weakness in the economy.
- Average hourly earnings for all U.S. employees fell in December by the most since comparable records began in 2006, showing signs of slack in the labor market.
- Sharps Pixley sees gold averaging $1,321 per ounce in 2015, citing the potential for investors to seek protection from currency debasement as well as a strong physical demand for the metal. Carter Worth of Sterne Agee said the New York gold futures drop in October-November was a “head fake,” since gold has been stabilizing as the U.S. dollar rallies.
- Although the U.S. producer price index declined 0.3% percent month-over-month in December, the drop was almost entirely attributable to food and energy. Excluding these components, core producer prices actually rose 0.3 percent. This counters the deflationary pressures arguments.
- The Swiss franc soared as much as 38 percent on the news of its euro-cap rate abandonment, a currency move that normally takes years to accomplish. The markets interpreted the move as a preemptive action ahead of the European Central Bank's QE next week. It also suggests that after six years of unprecedented intervention, central banks are losing control of markets and events. An unraveling of the markets would send investors rushing towards safe-haven assets such as gold.
- Along with the euro-cap rate abandonment, the Swiss National Bank lowered the negative interest rate on sight deposits to -0.75 percent from a previous -0.25 percent, as well as moving the three-month Libor target to between -0.25 percent and -0.75 percent. This came as a complete surprise to the market as most observers forecasted the cap to remain in place for years.
- Goldman Sachs reiterated its bearish outlook on gold, saying stronger U.S. growth should support higher real rates, thereby raising the opportunity cost of holding gold. Moreover, many of the fears that drove investors toward gold as a store of value, such as U.S. dollar debasement and high inflation, are now seen as moving in the opposite direction.
- With the failure of rate hikes and substantial interventions to prop up the ruble, any further decline in the currency could force the Russian central bank to begin liquidating its gold reserves. As the major accumulator of bullion in recent years, this could put downward pressure on prices.
- The intensifying deflationary environment in Europe, as well as the pessimistic outlook for global growth put forth by the World Bank, boosted the legitimacy of precious metals as a safe haven this week. The NYSE Arca Gold Miners Index and the Global X Silver Miners ETF rose 6.97 and 4.26 percent, respectively. Randgold Resources rose 9.31 percent this week.
- Major integrated oils bounced back this week despite no clear change in the trend of oil prices. BP rose 3.69 percent this week after a favorable ruling regarding the size of the Macondo offshore oil spill in 2010.
- Paper and forest stocks continued an uptrend with the dollar this week. International Paper closed up 1.92 percent this week.
- Metals and mining stocks suffered this week after the World Bank released a report lowering its 2015 global growth outlook to 3 percent from 3.4 percent. The S&P/TSX Capped Diversified Metals and Mining Index plummeted 15.4 percent this week.
- Refining stocks underperformed this week as the spread between WTI and Brent continued to narrow. The S&P Supercomposite Oil & Gas Refining & Marketing Index fell 8.99 percent this week.
- Coal stocks fell once again this week as global growth concerns and regulatory burdens weigh on the industrial metal. The Market Vectors Global Coal Index fell 3.61 percent this week.
- United States drilling permits have fallen from October highs amid the rapid decline in oil prices. The removal of excess production should help stabilize the imbalance between supply and demand.
- Many major oil companies are cutting costs to weather the current collapse in crude. Although this is a negative consequence of the decline in oil prices, it is also a sign that the structural imbalance is correcting itself.
- As Chinese smelters close and other operations reduce capacity, the copper surplus is set to decline this year. The industrial metal declined substantially in 2014 and is due for some relief.
- High leverage in the oil and gas industry is surfacing as a potential catalyst for a wider shock to the energy space. Between 2009 and 2014 the High Yield E&P Index has risen by $74 billion in market value. Over-leveraging has become an even greater risk given the decline in profits expected to accompany the slump in oil prices.
- The dollar remains the imposing negative indicator for the global commodities space. With the European Central Bank meeting on the horizon, the risk remains that inaction could fuel a further appreciation of the greenback.
- Chinese stocks continued to rally this week, posting the longest weekly winning streak in nearly eight years. Chinese equities continue to get a bounce on the prospects that the government will implement further easing policies. The Shanghai Stock Exchange Composite Index rose 2.77 percent this week.
- After the central bank unexpectedly cut its benchmark interest rate, Indian equities ended the week with solid gains. Importing 80 percent of its oil, India has seen relief from inflationary pressures, allowing the central bank to more confidently lower rates. The S&P BSE Sensex Index rose 2.42 percent this week.
- Another net importer of energy, Egypt has seen the resumption of its 2014 rally, which stalled in the back half of the year due to growing global growth concerns. The Egyptian Exchange EGX 30 Price Index rose 6.81 percent this week.
- This week was particularly volatile for European currencies after the Swiss government unexpectedly removed its currency peg to the euro. The Hungarian forint and the Polish zloty declined against the dollar, with the former falling 3.22 percent and the latter falling 3.36 percent.
- Peruvian markets struggled this week alongside a substantial decline in copper prices. Additionally, a report issued by the World Bank lowered the global growth forecast for 2015 to 3.0 percent from 3.4 percent. Copper, a primary Peruvian export, tumbled in response to the report, dragging down Peruvian equities with it. Thus, the Bolsa de Valores de Lima General Sector Index fell 5.71 percent this week.
- Despite Russian equities posting a solid weekly gain, the ruble continues to decline. The stumbling currency is now approaching the same levels it reached during the massive selloff in mid-December of last year. The ruble fell 4.94 percent against the dollar this week.
- Deflation is spreading through Eastern Europe as the eurozone struggles to spur economic growth. Given the recent declines in inflation figures, it appears both Poland and Hungary have much more room, and justification, to stimulate their economies through rate cuts. Such a policy move could have positive repercussions.
- India’s recent rate cut should prove beneficial for the country’s investment, according to Finance Minister Arun Jaitley. Furthermore, both Deutsche Bank and Macquarie Bank forecast a further decline in rates of 75 basis points for 2015.
- This week’s plummet in copper prices reinforces the deflationary pressure on the Chinese economy, which still has one of the highest real interest rates in the world even after the November cut. Indeed, Chinese monetary data for December missed market expectations, the latest reflection of anemic economic activity. This should keep market expectations alive for further policy easing in China going forward, which bodes well for the Chinese H-share banking sector (still trading at modestly below book value, around 6-percent dividend yield and 22-percent price discount to its A-share counterpart).
- Macau’s disappointing gross gaming revenue growth in December, together with Chinese President Xi Jinping’s recent advice for Macau’s economic diversification beyond casino gaming, may continue to weigh on the city’s casino operators.
- With Greek elections right around the corner, it is worth mentioning the volatility that has surrounded the event, as well as the potential volatility the outcome could bring to the country. If the popular Syriza party should win, markets will most likely respond negatively to the news given the wild speculation of a Greek exit from the eurozone. The short-term volatility that is most likely to occur in the upcoming weeks should be monitored carefully.
- Russia remains a threat to stability for Europe and other global markets. The Russian ruble has continued its steady and steep decline, while the government continues to be confronted with low oil prices, rising inflation and intolerable borrowing costs. With many analysts all but guaranteeing a contraction this year, Russia remains a market to avoid.
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