Gold Defying Goldman Sachs With Coffee Percolating: CommoditiesElizabeth Campbell and Isaac Arnsdorf
As the hip-hop duo Outkast once opined, “You can plan a pretty picnic, but you can’t predict the weather.” Big Boi and Andre 3000 could’ve been describing the commodity markets so far this year.
From drought in Brazil to the arctic blast that swept across North America, extreme weather drove coffee, sugar and natural gas into bull markets just as escalating political tension in Ukraine created supply risks for energy and grains. The rally for raw materials was a surprise to banks from Citigroup Inc. to Goldman Sachs Group Inc. that had forecast 2014 would mark a continuation of last year’s slump.
Commodity funds recorded inflows of $1.57 billion last month, the first gain since September, after withdrawals last year reached a record $43.3 billion, according to EPFR Global, a Cambridge, Massachusetts-based researcher. Investors who shunned gold as the metal slumped into a bear market in 2013 increased holdings through exchange-traded funds in February for the first time since 2012. Dryness in Brazil erased the prospect of a record coffee crop as prices jumped, after the longest slide in two decades.
“It’s a series of mostly unrelated factors that are catching commodities at a time when they’ve already been heavily sold,” said Paul Christopher, the St. Louis-based chief international strategist at Wells Fargo Advisors, which manages $1.4 trillion. “A lot of these factors are weather related and will fade. I don’t think this is a viable opportunity for a long-term investor. It’s more of a trading opportunity.”
The Standard & Poor’s GSCI Spot Index of 24 commodities climbed 3.3 percent this year, led by a 79 percent surge for coffee and gains for hogs, corn and gold. The MSCI All-Country World Index of equities rose 0.7 percent, and the Bloomberg Dollar Spot Index, a gauge against 10 major trading partners, slid 0.3 percent. The Bloomberg U.S. Treasury Bond Index rose 1.6 percent.
The GSCI gauge fell 2.2 percent last year, the first decline since the global recession in 2008, as a decade of higher prices spurred producers to build new mines, drill more wells and expand crop planting. Increased supply combined with slowing growth in China, the biggest user of everything from soybeans to zinc and cotton, prompted New York-based Goldman and Citigroup to declare an end to the commodity super cycle that caused raw materials to almost quadruple since 2001.
While many investors “threw in the towel” after last year’s slump, they shouldn’t give up on commodities, said Michael Aronstein, who correctly predicted the plunge in raw materials in 2008 and the 2009 rebound.
“Commodities will just be normal cyclical participants in an accelerating expansion globally,” said Aronstein, the president and chief investment officer of Marketfield Asset Management LLC in New York. “You’re returning to local supply-demand functions in commodities.” Aronstein said he started buying commodity-related equities at the end of 2013.
The U.S. economy will grow 2.9 percent this year, accelerating from 1.9 percent in 2013, a Bloomberg survey shows. The euro area will expand by 1.1 percent after a contraction of 0.5 percent last year. Eighteen of the 24 commodities in the GSCI index climbed in 2014, and seven of them have posted gains of 10 percent or more.
“It’s been a year full of surprises, no doubt about that,” said David Rosenberg, the Toronto-based chief economist at Gluskin Sheff & Associates, which manages about $6.8 billion. “There is a time-worn relationship between overall global growth and the commodity complex. Between what the U.S. is going to do this year and what Europe is going to do, global growth is going to be accelerating.”
Arabica coffee, the bean variety favored by Seattle-based Starbucks Corp., reached a two-year high this week amid the driest summer since 1972 for Brazil, the biggest grower. Crude oil jumped to the highest since September, reaching $105.22 a barrel in New York on March 3 as tensions escalated between Ukraine and Russia, the biggest energy exporter. Unusually frigid weather in the U.S. boosted demand for heating fuel, while supplies of natural gas and coal will decline to six-year lows by the end of this month, government data show.
The supply-and-demand outlook for individual commodities, rather than macroeconomics, is now driving prices, said Michael Haigh, the head of commodities research at Societe Generale SA in New York. Raw materials don’t have “much more downside” because prices are near the cost of production, while the outlook for slowing growth in China and emerging markets in general has already been factored in, he said.
Citigroup has turned “more neutral,” though the bank still isn’t bullish, said Aakash Doshi, a vice president of Citigroup Global Markets Inc. in New York. Geopolitical risk and weather spurred this year’s rally, and increased supplies will mean prices probably will decline in the second half of the year, especially for grains, he said.
Corn reserves in the U.S., the biggest grower, will jump 80 percent before this year’s harvest to 1.48 billion bushels after farmers collected a record crop in 2013, the government said Feb. 10. Global copper production will outpace consumption by 81,000 metric tons in 2014, after posting a deficit of 175,000 tons a year earlier, London-based Barclays Plc said in a report Feb. 12. The U.S. is extracting the most oil since 1989 as producers tap shale-rock formations.
The S&P GSCI Enhanced Commodity Index, Goldman’s preferred measure, will drop 4.3 percent in the next 12 months, analysts led by Jeffrey Currie said in a report last month. Declines will be led by a 14 percent drop for precious metals, while agriculture products will fall 9 percent, the bank said in the report.
The 2014 rebound is “more of a transient weather shock as opposed to something more persistent,” Currie said in an interview March 5. “It would need to be persistent before we would significantly change our view.”
Gold prices, already down about 30 percent from a record in 2011, will slip toward $1,100 an ounce by the end of the year as the U.S. recovery picks up momentum and the dollar gains, according to Michael Lewis, the head of commodities research at Frankfurt-based Deutsche Bank AG. Futures in New York settled at $1,351.80 yesterday. Commodities may “struggle to attract financial flows” as investors buy more equities, he said.
Bullion funds have attracted $522 million since the start of the year as investors returned to the precious metal amid the escalating turmoil in the Ukraine and slower-than-forecast economic growth in the U.S., data from EPFR show. That compares with a record outflow of $38.99 billion for 2013.
The price of gold jumped 11 percent since December, rebounding from the 28 percent plunge last year that was the biggest decline since 1981. Increasing demand from buyers of coins, jewelry and bars will help to sustain bullion’s rally this year, according to James Steel, chief precious metals analyst at HSBC Securities Inc. in New York.
Palladium futures in New York reached a one-year high of $785 an ounce yesterday as the U.S. and its allies considered sanctions against Russia, the biggest supplier. Output of the metal already has been disrupted by labor unrest in South Africa, the second-biggest producer. Miners have vowed not to back down from a strike that started in January.
The coldest start to a year since 2011 means consumers won’t see the normal seasonal drop in power prices. Natural gas is up 29 percent compared with a year ago, adding to costs for home heating and power generation. Nationwide, consumers may pay an average of 12.28 cents per kilowatt hour from March to May, 2.5 percent more than a year earlier, according to U.S. Energy Information Administration data. Prices will be highest in New England.
Frigid weather may also limit meat supplies as low temperatures force hogs and cattle to use more energy battling the cold, slowing weight gains. A deadly pig virus is compounding the outlook for shrinking U.S. pork supplies. Cattle and hog futures reached records in Chicago on March 5, increasing costs for retailers including Austin, Minnesota-based Hormel Foods Corp., the maker of Spam meat spreads.
World food prices posted the biggest gain in 19 months in February on concern that cold weather and drought in the U.S., the biggest exporter of wheat, and dryness in top-sugar producer Brazil will harm crops. An index of 55 food items rose 2.6 percent to 208.1 from 202.9 in January, the United Nations’ Food & Agriculture Organization in Rome said yesterday. The gauge is still down 2.1 percent from a year earlier.
Brazil’s coffee harvest will reach 47.7 million bags, down 10 percent from a previous estimate, Fort Lauderdale, Florida-based coffee importer Wolthers Douque, said March 5. A bag weighs 60 kilograms (132 pounds).
Coffee prices in New York tumbled 23 percent in 2013, the third straight decline and the longest slump since 1993. The driest January since 1954 for Brazil erased the outlook for a record crop, prompting investors to more than triple their bets on a rally last month, government data show.
“We’re in a period of rising unpredictability around climate change,” said Stephen Diggle, managing director and co-founder of Singapore-based Vulpes Investment Management, which manages $250 million. “We see it as a significant and rising threat to food production. The planet is going to experience more disruptions in food production in the coming years than it has in the past. That means we expect to see more volatility in prices.”