The great bull market in commodities, which began in 2002, ground to a halt in 2008 as oil prices plummeted and demand for raw materials subsided. What commodities will shine in the years ahead? BusinessWeek personal finance editor Lauren Young spoke with Derek van Eck, chief investment officer at Van Eck Global, who oversees more than $6 billion in commodities mutual fund assets.
How would you sum up the outlook for commodities?My expectations for China, which is a huge consumer of commodities, are more optimistic than the general consensus. I think we are in the trough of China's growth cycle now and that growth will accelerate in the second quarter of 2009. Once the Chinese ramp up their infrastructure program again, they will start buying commodities, especially copper.
In addition, we've seen large rate cuts from every central bank, and more cuts are coming. This massive amount of government intervention will stabilize demand and put a floor under commodities prices in the next several months.
Beyond that, the outlook is materially better. We remain in an energy crisis. The urgency has been delayed because of the economic crisis, but it will resume in late 2009 or 2010. The shortage in fuel supply means new spending to find sources of oil and gas. Some people think crude oil will hit $25 per barrel in 2009. That's highly unlikely, given a likely pickup in demand as well as less supply coming to the markets later this year.
You like gold right now. Why?We've upped the gold exposure in our precious metals fund because gold prices usually rise after a recession. That's thanks to an accommodative policy from the Federal Reserve that pumps money into the system and will eventually raise inflation concerns. Gold should hit old highs of roughly $1,000 per ounce in 2009, from $835 today, and will probably exceed it. Longer-term, gold prices could potentially double. Gold equities have underperformed gold exchange-traded funds, which actually own gold bullion. As a result, you can buy gold mining companies at bargain prices. My favorite is Kinross Gold (KGC), which is based in Canada but trades in the U.S. [Kinross represents 12% of the Van Eck International Investors Gold Fund.] Unlike other gold companies, it doesn't produce any base metals. That's a good thing, because the base-metals market is saturated with supply at the moment.
And how are you playing the energy market?In the short term, I am playing the energy markets cautiously. Commodity prices are searching for a floor, as a result of poor demand given the economic crisis, but also as a result of too much supply, particularly in natural gas markets. The credit crisis is restricting capital spending by energy companies. We are cautious until a tipping point is reached. Natural gas prices are then likely to improve considerably. We'll probably see prices stabilize in the second quarter of 2009.
I like XTO Energy (XTO), a top natural gas producer in the U.S. [XTO represents 5% of Van Eck's Global Hard Assets Fund.] It has the best engineers. It also has conservative energy hedges for future sales of natural gas and oil, so it should survive 2009 in good shape.
How is the push to develop alternative energy sources affecting the commodities sector?Nothing is growing quicker in the commodities markets than alternative energy. It is showing 15% compound annual growth vs. other commodities, which are growing at 2% to 4% annually. I see alternative energy leading the growth parade as the incoming Administration looks for new energy strategies. We like power transmission companies, which are developing a smart grid technology. There's a good chance the new leadership will focus on transmission upgrades as part of an infrastructure plan.
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