At a time when Goldman Sachs Group Inc. (GS:US) and Credit Suisse Group AG are predicting the bear market in commodities will end, a gauge of prices for raw materials from cow hides to steel is extending the longest slump since it presaged the global recession in 2008.
Credit Suisse said June 21 that an economic recovery will spur a 9.3 percent gain in commodities in 12 months and Goldman forecast a 29 percent return on June 11. A measure of industrial commodities from the Journal of Commerce that includes rubber, plywood and burlap is signaling contraction for an 11th month, the longest stretch since a retreat of the same duration that began in August 2008.
The JoC-ECRI Industrial Smoothed Price Index reached its most negative ever in December 2008, when the panel dating U.S. business cycles declared a recession. Europe’s debt crisis will be contained and the U.S. and China are still expanding, Goldman said. Credit Suisse highlighted global growth and low interest rates. The Federal Reserve cut its U.S. forecasts last week, a Chinese factory output gauge indicated an eighth monthly drop, and German business confidence fell to a two-year low.
“The picture that’s emerging is pretty clear: there’s a global slowdown of significant proportions,” said Martin Murenbeeld, the chief economist at Toronto-based DundeeWealth Inc., which manages about C$100 billion ($97 billion) of assets. “Commodities are simply reacting to the facts as they are on the ground.”
The JoC index, tracking the annual growth rate of 18 commodities, fell below zero in August. The measure, begun in 1985 by Geoffrey Moore, founder of the Economic Cycle Research Institute and a mentor to former Fed Chairman Alan Greenspan, tracks the ratio of price changes from a year earlier. Nine components, including ethylene and red oak, aren’t traded on U.S. exchanges and are less influenced by investor sentiment.
The Standard & Poor’s GSCI Spot Index of 24 commodity futures, which peaked six months after the JoC index turned negative, retreated more than 20 percent since February, the common definition of a bear market. Investors fleeing for the perceived safety of government debt drove a 1.9 percent return in Treasuries this year, a Bank of America Corp. index shows. The dollar gained 2.7 percent against a basket of six major trading partners, and the MSCI All-Country World Index of equities rose 0.4 percent.
Seventeen of 24 commodities tracked by the S&P GSCI fell at least 20 percent from their highs in the past year, including copper, gasoline, cotton, natural gas, aluminum and corn. Crude oil tumbled 29 percent from its closing peak on Feb. 24, reaching an eight-month low of $77.56 a barrel in New York on June 22.
During the 11 previous commodity bear markets since 1973, the S&P GSCI fell for 15 months on average with losses of about 22 percent beyond the initial 20 percent retreat, according to Kevin Pleines, an analyst at Birinyi Associates Inc. in Westport, Connecticut. About 63 percent of the time, the gauge bottomed within six months of reaching a bear market, Pleines said in a June 22 report.
The rebound may be swifter this time because global growth is forecast by the International Monetary Fund to accelerate to 4.1 percent next year, from 3.5 percent in 2012.
The slump is “likely overdone, and the price risks are shifting more to the upside” as Europe contains its debt crisis and central banks take action to spur growth, Jeffrey Currie, Goldman’s head of commodities research in New York, wrote in the June 11 report. The bank advised buying oil, copper, aluminum, natural gas and gold. The S&P GSCI fell 1.7 percent since then.
“Commodity markets have the potential to stage a comeback,” Credit Suisse analysts led by Tobias Merath wrote in their report, saying that “undervalued” metals markets may present the best opportunities. The S&P GSCI Total Return Index, which takes into account the cost of maintaining positions in futures markets, will rise to 4,690 points in 12 months, from 4,291.2 yesterday, they said.
The Fed has kept benchmark U.S. interest rates near zero since December 2008 and said June 20 it expects to keep rates “exceptionally low” at least through late 2014. That same day, central bank policy makers extended Operation Twist, a program to replace short-term bonds with longer-term debt.
Commodity bulls anticipate the Fed will take more steps to keep the economy from stagnating, including a third round of so- called quantitative easing. The central bank bought $2.3 trillion of debt in two rounds through June 2011, during which the S&P GSCI rose more than 80 percent.
China, the largest consumer of everything from copper and cotton to pork and soybeans, cut interest rates on June 7 for the first time since 2008 after growth slowed for five straight quarters. Chinese banks made record loans in May after the government reduced the amount of cash they must set aside as reserves for a third time in six months.
“There’s easing everywhere, and that’s the reason that as an investor you have to be more optimistic,” said James Paulsen, the chief investment strategist at Wells Capital Management, which oversees about $333 billion of assets. “The biggest catalyst that could change things is the emerging markets showing a re-acceleration in growth.”
That may be curbed by depreciating emerging-market currencies, which raises costs for buyers of dollar-denominated commodities. India’s rupee sank to a record low on June 22 while China’s yuan has depreciated 1 percent since March, more than in any other period since its 1994 devaluation.
The S&P GSCI as much as quadrupled in the past decade, attracting $394 billion of investment by May, according to Barclays Plc. There was $10 billion invested in 2001, based on the bank’s measure of exchange-traded products, index-linked funds and medium-term notes. There were 1.42 million U.S. oil futures outstanding, exchange data yesterday showed, up from 420,988 at the end of 2001. Prices are about four times higher.
While Greece elected a new government this month, easing concern that the 17-nation euro zone would rupture, European leaders are still in conflict after the incoming officials said they plan to scrap some austerity measures and reduce sales taxes.
Greece, Ireland and Portugal have already sought bailouts and Spain formally requested aid for its banks yesterday. The economy of the bloc sharing the common currency will contract 0.5 percent in the second quarter, entering a recession that won’t end until next year, according to the median of 16 economist estimates compiled by Bloomberg.
Europe’s crisis “has reached a critical stage,” and the “economic environment continues to deteriorate,” the International Monetary Fund said in a report June 21. The Fed lowered its forecast for U.S. growth to 1.9 percent to 2.4 percent on June 20, from 2.4 percent to 2.9 percent in April.
“There is not a lot of demand,” said Stephen Hammers, who helps manage $1 billion of assets at Compass EMP Funds in Brentwood, Tennessee. “China may make things for the world, but if the world is not buying it, then it affects them too. We can be in this environment for the next couple of years.”
Economists are becoming more pessimistic as commodity analysts anticipate ample supply. Global oil output will rise 2.4 percent to 89.06 million barrels a day in 2012, exceeding consumption of 88.78 million, the U.S. Department of Energy said June 12. Crude inventories reached 387.3 million barrels on June 15, the highest since 1990, government data show. The U.S. pump price for gasoline fell 13 percent to $3.411 a gallon from a 10- month high on April 4, AAA data show.
Global aluminum production will exceed demand until 2015, while stockpiles will grow this year for lead, zinc and nickel, Morgan Stanley said in a June 17 report. Speculators have been betting on a slump in copper for five weeks, the most-bearish run since January, U.S. Commodity Futures Trading Commission data show. The price has dropped 28 percent to $3.3205 a pound since setting a record close in February 2011 in New York.
Chile’s Codelco, the world’s biggest copper producer, plans to spend as much as $27 billion this decade to revive aging mines. Australia, the world’s biggest iron-ore exporter, said mineral exploration spending rose 12 percent to a record A$1.09 billion ($1.09 billion) in the March quarter.
Corn farmers in the U.S., the world’s top grower and exporter, are forecast by the government to plant the most acres since 1937. Sugar and cotton are predicted to be in surplus this year, according to Rabobank International.
U.S. equities beat industrial commodities in three of the past four slumps, data compiled by Bloomberg show. In the 16- month U.S. recession from July 1981 to November 1982, the Dow Jones Industrial Average gained 9.1 percent as the S&P GSCI fell 11 percent. From December 2007 through June 2009, the S&P GSCI slumped 26 percent while the Dow tumbled 36 percent.
“The global economy is getting worse,” said Michael Pento, the president of Pento Portfolio Strategies in Holmdel, New Jersey who correctly forecast the commodity slump of 2008. “The only thing that will save commodity prices for now is massive intervention from the European Central Bank and the Fed. I do think the intervention is coming, but just not right away.”
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