Commodities Controversy: Will Prices Rebound?

Commodity indexes are in the gutter. A representative case is the Power Shares DB Commodity Tracking ETF (DBC) which dropped from $45 per share in 2008 to $20 in 2009. This was followed by a recovery to just above $30 in 2011, but it later fell to slightly above $15 on Aug. 7. It has not recovered. Fifteen dollars per share is a 66% drop from #45 in 2009 (see below).

If the total stock market tanked this much we would know we were in trouble. But, apparently if commodities take the same plunge, there is a controversy.

Chart of Power Shares DB Commodity Tracking ETF (DBC) from YahooFinance.com (Aug. 10). Note DBC invests in commodities futures contracts so it inherently carries substantial risk.

The Uptick Corner

Jimmy Rogers, a respected investment authority, says that the downturn in commodities is short term and simply reflects variation similar to stock fluctuations in price. Rogers graduated from Yale, started the Quantum fund with George Soros and retired at age 37. He has written five books about investing and is both verbal and positive about commodities.

Peter Krauth, a resource specialist on Money Morning, is in the same court. He writes in a section headline that “Population Growth and Urbanization Will Send Commodity Prices Higher.” Krauth supports his opinion with data. “The world's population is still growing by about 90 million a year…Demand power for China's consumer base could reach $67 trillion over the next decade as the Asian nation transforms to a consumption economy, according to The Demand Institute, a think tank run jointly by The Conference Board and Nielsen.”

The Downtick Corner

Others, however, focus more on the downside. They are receiving a lot of press. Jeff Sommer, in his Aug. 9 New York Times article entitled, “A Cheer and a Half for Cheap Commodities, writes that “Big declines in the price of commodities have preceded recession and bear markets.” Now, this is an attention grabber but not the emphasis of my present article.

A more focused look was by Howard Gold in his Nov. 14, 2014 Market Watch column. He quoted a specialist saying that commodity cycles are roughly 13-15 years in duration. This is short according to an academic paper written in 2012 that indicates that commodity super-cycles range from 30-40 years.

My Take

So, this is where we are as far as I can judge. Jimmy Rogers isn’t precise enough as to when he thinks the upturn in commodities might occur. Peter Krauth, whose column “Here's What Will Fuel the Commodity Prices Rebound,” seems to indicate an uptick is imminent, but really my take is that he is talking longer term. Howard Gold expresses the sentiment of a specialist in saying that the commodities cycle is 13-15 years. Yet, an academic paper talks about 30-40 years super cycles.

With all this apparent conflict, does anyone know what to do with an investment in DBC or any of the other similar commodity products? Certainly not. If they do, they are only guessing.

This makes me glad that I purchased very little of DBC. Nevertheless, one hates to lose money. Like so many other bets (and that is what investing is, educated risk-taking) I’ll treat this situation similar to many others. Likely, I’ll sell half of what I have even though it is down. For the rest, I’ll hope for the best. There may be some basis for my optimism. However, at least in the short term, DBC has run counter to the stock market (please see below). If the DOW and related indexes fall 10% or more perhaps commodities will see a rally again sooner rather than later. Or, maybe not.

The performance of DBC from 2006 to 2015. Note that in this relatively short period of time, DBC in blue is inversely correlated with the Dow (in red). From Yahoofinance.com (Nov. 2).

For More:

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Where to Invest with Stocks at Record Highs Commodities as a consideration