We know that financial markets and sectors are cyclical by nature. Often their gyrations are tied to economic conditions, demographic trends or geopolitical forces. So you would think that after four years of declines, maybe commodities would reverse their fortunes in 2015. But, if the first three months of the year are any indication, don’t hold your breath.
During the first quarter, oversupply conditions and the continued strength of the U.S. dollar depressed prices for many raw materials. As the theory goes, since most raw materials are denominated in dollars, a strengthening U.S. currency makes commodities more expensive, resulting in lower demand.
Iron ore (–25.0 percent), lean hogs (–23.1 percent), coffee (–20.2 percent), sugar (–17.8 percent) and nickel (–17.2 percent) were among the big losers. There were few winners; gasoline (20.3 percent), silver (6.4 percent) and cotton (4.7 percent) were the quarter’s top performers.
The prices for base metals — aluminum, copper, lead, nickel, tin and zinc — all moved lower during the first quarter. Prices on the London Metal Exchange were down an average of 7.63 percent during the first three months of 2015. Earlier this year, Morgan Stanley lowered its price forecasts for nearly all base metals due to headwinds caused by the robust dollar and slowing economic growth in China, which continue to adversely affect demand.
However, maybe things aren’t so bleak.
In early April, Mark Mobius, executive chairman at Templeton Emerging Markets Group, when asked about his top conviction call, stated in a CNBC interview, “Right now, it’s commodities, believe it or not. They are so far out of favor.”
Mobius explained, “Of course, we’ve had a slump recently, but global economic growth continues. This is just temporary.”
Will commodities bounce back in the second quarter or even in the coming year? Only time will tell. But in the meantime, keep a close watch on the dollar, as it will continue to influence the fortunes of most commodities in the near term.
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Larry Gray is editorial director of Institutional Real Estate, Inc.
