Investment Strategy: First Quarter 2020 – Commodities
- Our ‘catch-all’ holding in this asset class is the JPM Natural Resources fund and its rocky ride this year shows how volatile the asset class can be; at its height, it had returned 20% but by year-end had fallen back to 12%. Gold mining shares have been the classroom swots, energy shares the bad boys in the back row.
- Gold has been a ‘winning’ commodity this year, returning 18% in dollars (14% in sterling) and scaling its highest peak since 2011. With bond yields tumbling in 2019 the ‘gold isn’t a proper investment because it doesn’t produce any income’ argument is diluted and the yellow metal tends to have a negative correlation with US Treasuries. A stalling dollar also helps, as does plenty of political upheaval which sends investors looking for ‘safe havens’. Gold isn’t signalling a return in inflation; it’s reflecting very low and negative interest rates such that there is no ‘carry cost’ to Gold as there is when savers rates are positive. My wife’s Swiss relatives are having to pay 1% on their cash savings at the bank so their bottom drawers are packed with Gold bars. Nice. As I pointed out last quarter there has been a stealth bull market in Gold for UK investors over the last few years because even though Gold is denominated in dollars it is actually bought by investors in their own domestic currency. Gold is currently trading around $1500/oz, well below its peak of $1920/oz in September 2011 but the strength of the dollar is such that that Gold is actually near all-time highs in sterling, yen and euros.
- The oil price was volatile at times last year, as is often the case. Brent started 2019 at US$54/bl, flirted with US$75/bl in the ‘risk-on’ rally in the first half of the year but fell back and finished the year at US$66/bl. Global demand is waning, growing at its slowest pace since 2008, and with US shale turning a profit at US$35/bl there is potential oversupply in the market. OPEC has agreed production cuts until April but compliance amongst members is questionable. A fairly tight range around US$65/bl looks the best bet for the oil price this year, but when is the consensus on commodity prices ever right, especially with the tinder box of global and especially Middle Eastern politics. Market veterans still laugh at Goldman Sachs prediction of US$200/bl in 2008 followed (with a straight face) by their prediction of US$20/bl in 2011.
Summary: Gold had a resurgence in 2019, breaking through US$1500/oz for the first time in seven years being a beneficiary of lower US interest rates, collapsing global bond yields, a stalling US dollar and the search for safe havens. Oil faces the headwinds of oversupply and slowing demand. Energy and mining stocks were market laggards last year.
