Three Reasons Commodities Look Horrible: Roubini Strategist
It's been one of the worst investments of 2013—and this Roubini strategist thinks it will get even worse.
Gold, copper and grain prices have dropped precipitously this year. In fact, JPMorgan's commodity team recently used that as a reason to get bullish on the space. "In a number of commodities, prices have fallen far enough for long enough to force involuntary cuts in production and to spur fresh demand," JPMorgan's note read.
In fact, JPMorgan said that "Sentiment is universally bearish," creating some real opportunities.
But Gary Clark says that sentiment is bearish for a reason. On Tuesday's "Futures Now," the commodities macro strategist at Roubini Global Economics listed the three catalysts that will continue to drive commodity prices lower.
Reason One: Declining Chinese Demand
Chinese expansion has been a huge factor that has undergirded the long run up in commodity prices. But now, "we're seeing weakening in demand growth across the board there," Clark said.
As Clark predicts in a recent note, "China's slowdown will accelerate next year, driven by a collapse in the metal-intensive, investment-driven portion of growth. Demand for metals will fall much more sharply than headline GDP growth numbers would suggest, from double-digit to low single-digit growth and possibly to zero" in the case of iron ore.
And just how important is Chinese demand? "To offset a 1 percent decline in Chinese copper or aluminum demand would require a 3 to 5 percent boost in U.S. or European demand or a 15 to 20 percent boost in Indian or Brazilian demand," Clark writes, adding: "all of which are highly unlikely."
Reason Two: Rising Supply
Clark doesn't just see bearish signals on the demand side of the commodity equation—he sees them on the supply side as well. At the same time that Chinese demand is dropping, "We're seeing rising supply across the whole of the commodity space," Clark said.
For instance, Clark writes that "the copper market should remain in surplus in 2013 to 2014," and "other industrial metal markets are either in surplus or expected to move into surplus." On the oil side, "North American output continues to rise."
Reason Three: The End of Easing
Clark believes the tapering down of Federal Reserve easing also will weigh on commodity prices. "With the end of QE3 and a renormalization of rates, that brings interest rate risk back onto the table, and that can lead to the unwinding of carry trades," Clark said.
The basic problem is that unlike bonds or dividend-paying stocks, commodities yield nothing. When a 10-year Treasury note yields less than 2 percent, the difference between that and the zero-percent yield of a commodity like gold doesn't seem like much. But as rates "renormalize" higher, commodities begin to look far poorer when compared to bonds.