What a difference 365 days can make. This time last year, the Commodity space as an asset class was in the grips of a massive de-leveraging process that brought several commodities to the lower end of their decade trading ranges. However, Time Magazine person of the year, and a favorite person of mine, Ben Bernanke provided much needed "confidence" to the space with his historic 60 Minutes interview in March. In addition, the economic global stabilizing force that China was in Q1 2009 provided a "buyer of last resort" to the space. I hate to be critical of our government, but I have to mention my disappointment that we did not purchase and store commodities for future use during that historic freefall.
For 2010, commodities, as an asset class, should be loved once again - in longer term portfolio strategies. The risk of inflation, a falling dollar, and resurgent emerging world demand are all worthy reasons to bring back the love. To properly identify the global fundamental improvements, let's take a look at several "base metal" prices.
I suggest that the following 3 base metals will be leading indicators in 2010 to determine if the global recovery continues or takes a temporary pause.
COPPER MARKETSource: Bloomberg
Precious metal investments seem to be driven more by "paper asset demand." Many more investment vehicles for exposure to precious metals exist. Gold is a popular story, no doubt. On that note, as long as Central Banks continue to purchase Gold, it will remain a desired asset in the near term and should remain above 1050.00 in 2010. Longer term portfolios should always maintain Gold for diversification purposes. However, it needs to be an amount that keeps emotion out of the decision making process, as the highly volatile nature of gold tempts the investor to alter the game plan continuously.
Silver and platinum are less frequently discussed precious metals but do offer excellent fundamental insight. Over 50% of Silver's usage is directly related to industrial demand. Platinum inventories are still challenged by supply shortages related to the South African power shortages. Platinum usage is rather high in BRIC nations and should be a 2010 leading indicator for a continued BRIC recovery or any potential correction.
Agriculture/soft commodities have recently recovered their previous popularity. However, it is rather difficult for investors to gain adequate and proper exposure to the space. It is also challenging to properly identify the fundamentals of those commodities. Supply/demand imbalances change rather quickly.
Looking ahead for 2010, the more fundamentally supply challenged Ag names would be Sugar, Corn, and Cocoa. Once again, however, gaining proper exposure remains an obstacle with the potential for extreme volatility. Therefore, I would be less focused on their inclusion in a portfolio versus other commodities. If there would be "one to love," I suggest Corn. For 2010, I believe a jump in Energy prices, recovering ethanol demand and challenged global inventories should support Corn prices.
That brings me to the two "sleeper commodities" for 2010 - Natural Gas and Steel
Steel prices have begun to recover and expectations for the space remain tepid at best. Chinese auto sales are surging. In addition, steelmakers have spent the past 400 days managing inventories extremely well, better than any other industry that needed to quickly reduce production. However, I reiterate that steel is a "sleeper" which means challenges exist. Hot Rolled Steel prices need further improvement. A trough occurred in early May and prices have only modestly recovered into October. Further improvement in pricing is needed before investors jump-in aggressively.
HOT ROLLED STEEL
Similarly, Natural Gas prices have the potential to rebound in 2010 in "sleeper fashion," but further improvements in the supply/demand balance are needed before an aggressive strategy is implemented.
The recent ExxonMobil acquisition of XTO Energy has brought Natural Gas front and center, and it should be. Natural Gas is the "bridge" fuel for our domestic energy challenges. The looming carbon emissions changes create a rather easily answerable question for Industrial usage - Coal or Natural Gas? Natural Gas is the answer and I believe it will displace Coal as the second most used source of energy domestically.