Perhaps it’s not a stretch to equate investment manager Jeffrey Gundlach to a latter-day E.F. Hutton … i.e., when Gundlach talks, people listen. Given the number of prescient calls he has made in recent years, it undoubtedly piqued the interest of investors late last year when he pounded the table with a bullish call on commodities. It wasn’t quite like Nikita Khrushchev pounding his shoe on the podium at the U.N. in 1960, but he clearly expressed his favorable view on commodities. “We’re right at that level where in the past you would’ve wanted commodities instead of stocks,” the chief executive of DoubleLine Capital said during a webcast in December. He expressed similar sentiments on CNBC.
Gundlach’s take is that commodities are now at historically low levels compared to equity returns based on the historical relationship between the relative returns on the S&P GSCI commodity index and the S&P 500. But the flip side of that is there’s a good reason that commodities are cheap on a relative basis. Namely, the likes of oil, natural gas and various foodstuffs, to name a few, have suffered miserable price declines in recent years due to unfavorable supply and demand dynamics. In turn, investors more or less have turned their back on the collective commodities group.
But now the pendulum is swinging back in the opposite direction. The price of copper ended 2017 at its highest point in nearly four years, while other base metals including aluminum, lead, zinc and nickel posted strong gains. Even long-suffering oil showed some life with light sweet crude ending the year at $60 a barrel on the New York Mercantile Exchange, its highest settlement value since June 2015.
Last year’s global growth story produced a hunger for a range of commodities, and some forecasters—including Gundlach—expect this to continue in 2018. Equally important, some observers say, is that a number of commodity producers have taken steps to tilt the supply and demand curve back in their favor.
“In my view I think we’re at the start of a new commodity cycle,” says Maxwell Gold, director of investment strategy for ETF Securities, an exchange-traded fund provider specializing in commodities. He notes the great commodities super cycle of the 2000s, which started in the late 1990s and lasted until a large selloff began in 2010, finally hit bottom around 2014. “That’s been the last 15-year cycle,” he says.
Commodity cycles follow their own time line compared to other cycles, Gold says, adding that business and economic cycles tend to last five to seven years and commodity cycles 10 to 20 years, while long-term interest rate or credit cycles tend to be multi-decade periods.
Gold believes the new commodity cycle will likely persist for many years to come. “We’re seeing more discipline and cutbacks on the supply side in the oil markets, and miners on the materials side are cutting back and reducing capital expenditures on new mines, so they’re looking to increase margins and reduce investment to focus more on profitability. This all impacts supply,” he says.
That view is shared by Kevin Baum, chief investment officer at USCF Investments, sponsor of the United States Commodity Funds suite of exchange-traded products.
“With commodities overall, we’re in a price-bottoming phase in terms of supply, and that should lead to a more bullish pricing environment going forward as commodity supplies struggle to keep up with global demand,” Baum says. “That said, I’m not suggesting we’ll see a repeat of the last cycle, with a big difference being China’s economy is transitioning from a reliance on infrastructure build-out to more of a consumer-spending-led economy.”
Different Strokes