In Gold, Play the Shares Not the Metal: Fund Manager
Some hedge funds have lost hundreds of millions of dollars in the recent commodity market blow-off and it has certainly reintroduced an element of two-way action back into the trade.
The correction has been viewed by many as a useful removal of speculative froth from a bullish commodity cycle that still has further to run.
Evy Hambro, Director at Blackrock and long time gold fund manager, falls into that camp. But, says Hambro, the short term opportunity could be the shares and not the metal.
"We switch between bullion and the miners in our funds at Blackrock depending on how defensive we want to be and right now we are looking at this short term underperformance in the miners compared to bullion," Hambro told CNBC.
"Until February of this year the shares were outperforming, but the generalist investor became worried about the high margins and the cash flow generated by the miners and whether it would be put back into the ground or go back into investors' pockets," he added.
Hambro says management at the likes of BHP and Rio Tinto have given assurances that they are focused on creating shareholder value, but that it is going to take some months before investors are convinced.
Until then the underperformance against the physical market will continue, but that represents an opportunity, according to Hambro.
The pick of the crop, he said, are the South African miners in particular which he describes as "the cheapest on the planet."
On the broader commodity storyhe is says that while supply in these markets remains tight there will continue to be a lot of volatility, but that copper miners in particular have announced lower levels of production, which means supply side constraints will support prices.
When asked why prices have fallen in industrial metals in recent months, Hambro argues end-users have been running down inventory in the hope of lower entry prices and they will be forced to restock. As they dip in and out of the market on pull-backs, they will prevent prices falling too far.
Bob Parker, Senior Advisor at Credit Suisse, agreed on the main points but added he felt soft commodities would miss out on this support because significant investment has gone into raising yields in the last year or so "we are going to see that turn up in higher supplies in the next few months and in my view that will mean soft commodities underperform the metals this year."
"That's assuming the weather behaves itself," Hambro said.