2014: The Year of Commodities?

February 23, 2014 · by 

At the beginning of last year, Wall Street analysts predicted commodities and precious metals would be the biggest winners of 2013. Their rationale was simple: with central banks around the globe printing money, the price of commodities should go up. We now know how wrong the analysts were. Gold, silver and commodities, in general, were among the worst performing assets in 2013.

After such poor performance, analysts started 2014 predicting another bad year for commodities. A couple of months ago, Morningstar, for example, said the outlook for commodities in 2014 was bleak and declared that the sector was “virtually friendless.”1 Barclays wrote a report saying, “We view 2014 as likely to be another difficult year for commodity investors.”2 Once again, the rationale was simple: with the Fed reducing the size of its bond purchase program known as Quantitative Easing (QE), and the Chinese economy weakening, the price of commodities should go down.

But, guess what happened? Analysts were wrong again. Merrill Lynch’s legendary strategist Bob Farrell once said that, “When all the experts and forecasts agree, something else is going to happen.” That certainly seems to be the case for commodities so far this year. Gold, silver and commodities, in general, are among the best performing assets.

This Could Be The Beginning Of A Major Turnaround
As you can see in the chart below, since peaking in 2011, the CRB commodities index dropped 26%. Last year was the first time since 1991 that the commodities index posted declines for three years in a row. As a result, investors didn’t want anything to do with commodities at the beginning of this year. But, it was precisely this excessive pessimism that created the conditions for a rebound.


Violation of Downtrend Line Suggests Rally May Have Legs
Violation of Downtrend Line Suggests Rally May Have Legs

While the stock market, as measured by the S&P 500 Index, is flat so far this year, the CRB commodities index is up 8.5%. It’s important to keep in mind that the cold winter has played a major role in the rebound of certain commodities, such as coffee and natural gas. The unusually cold winter has boosted demand for natural gas, pushing its price 40% higher this year. Coffee has gained 52%, mainly because of a severe drought in Brazil, a major producer of this commodity.

But, this doesn’t mean you should believe this rally is happening exclusively because of the extreme weather. Gold, silver, cocoa, cotton, soybeans, and sugar have all rebounded recently. Copper and oil, two of the world’s most economically sensitive commodities, are also showing some signs of strength. This broad rally is worth watching because it could be an early sign that inflation is starting to surface.

Despite this broad rebound in commodities, most people have focused on precious metals. And, for good reason. Despite the Fed’s ongoing tapering, gold and silver have shown tremendous strength recently. Since bottoming in mid-December, silver is up 11%, while gold is up 9%.

The Gold Bull Market Is Alive
After bottoming out in December, the yellow metal hasn’t looked back. It has risen from a low of $1,181 to $1,315 this past week. Gold mining stocks have performed even better. The HUI gold bugs index, which measures the performance of miners, is up 25% since mid-December. This outperformance suggests there’s a major shift in sentiment taking place. After a terrible year for precious metals, sentiment reached an extreme level of pessimism in 2013. Investors are now starting to find value in gold and gold stocks.

It’s also important to keep the big picture in mind. After dropping 28% in 2013, many declared the gold bull market was over. But, we’ve seen something similar before. In the first half of the 1970s, gold went from $35 per ounce to $200 per ounce. Then it suffered a violent correction of 50% in 1975-76. Many declared again that the gold bull market was over. But the metal managed to rally all the way to $850 per ounce.


Gold Remains In A Long-Term Uptrend
Gold Remains In A Long-Term Uptrend

So, it’s perfectly normal to see a big correction during secular bull markets. As you can see in the chart above, the long-term uptrend remains intact. This suggests the big bull market in gold that started in 2001 is alive and well. This, however, doesn’t mean gold will move straight up. There will be lots of selling pressure along the way. In fact, after such a big rally, we should see some consolidation or a pullback in the short-term. But, it does look like the big correction that started in 2011 is over.

And remember, at the beginning of this year, the overall consensus in Wall Street was that commodities would have another bad year. So, 2014 may actually turn out to be the year of commodities.

Until the next Daily Pfennig® edition…

Tim Smith
Assistant Vice President
EverBank World Markets, a division of EverBank

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Nuria Pujol