Guest Commentary by James Roemer, Meteorologist/Commodity Trading Adviser
In 2015, we saw the Commodities sector endure its biggest annual rout since 2002. This commodity price falloff was led by crude oil, which fell 34%, as well as by natural gas, grains, and many other agricultural commodities, which fell 15%–25%. More recently, El Niño (warm ocean currents in the central Pacific that change global weather patterns) has helped world grain production rebound. While global weather patterns improved this past year, helping soybeans, corn, wheat, and coffee to increased production, the lone stars in the Ag sector were sugar and cocoa, which saw 15%–25% price increases due to El Niño-related weather problems in Africa and Southeast Asia.
Just because the Commodities sector appears cheap, is that a reason to jump right in and buy the entire index hand over fist? While I believe there will be some “shining stars” during 2016, and it makes sense for all investors to have some exposure to a sector so beaten up over the last two years, I am reminded of two important investment maxims from Sir John Templeton: (1) “The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell”; (2) The time to buy a commodity is when the short-term owners have finished their selling, and the time to sell is often when short-term owners have finished their buying.
Bull markets in commodities are often led by “hedgers” such as large farmers, commercial grain companies, oil refineries, individual manufacturers, and the private or governmental sectors of various nations trying to procure a particular product (copper, zinc, crude oil, soybeans, etc.) in case of a price rise. For the last two years, an economic slowdown in several countries, combined with generally ideal global weather, has meant there has been little panicky buying by hedgers.
El Niño and My Outlook for Commodities in 2016