Goldman Sees More Pain Ahead for Commodities

ETF Trends

Large investment banks paint a dreary picture in the commodities space  as rising supply and slowing demand depress prices this year. However, there are a couple of standout commodities and related exchange traded funds.

The commodities super cycle is reversing, with the Standard & Poor’s GSCI Spot Index, which tracks 24 commodities, declining for three straight quarters through December, Bloomberg reports. [Supply Glut, Low Demand Continue to Weigh on Commodity ETFs]

Specifically, copper, corn, sugar and coffee will see a surplus this year after a bull market pushed producers to build new mines and expand planting.

“Supply growth is still formidable across most commodities,” Rob Haworth, senior investment strategist at U.S. Bank Wealth Management, said in the article. “It will take some time for actual demand trends to start to overwhelm that increasing supply.”

Meanwhile, the global economic engine has been working below capacity and demand for raw materials remains muted.

“We are still at below-trend GDP growth, and typically in this environment you see weak commodity returns and low volatility,” Jeffrey Currie, Goldman Sachs’ head of commodities research, said in the report. “The expectations are the U.S. grows near trend, but Europe won’t, and the emerging markets won’t. If the growth was above trend everywhere, we’d be jumping into commodities.”

Goldman Sachs Group warns that commodity prices could continue to fall 3% in 12 months, with precious metals falling 15%, agriculture declining 11%, industrial metals dipping 5%, livestock diminishing 3% and energy receding 1%.

Societe Generale SA has already advised clients to stay underweight agriculture, gold and silver this year.

Commodities will take a “back seat” to other assets after the gains from 2009 to 2011 that were “built on unsustainable factors,” Citigroup analysts Jon Bergtheil and David Wilson said.

The largest broad commodities ETF, PowerShares DB Commodity Index Tracking Fund (DBC) , tracks a basket of aluminum, brent crude, copper, corn, gold, heating oil, light crude, natural gas, RBOB gasoline, silver, soybeans, sugar, wheat and zinc. DBC has declined 11.2% over the past year.

The PowerShares DB Agriculture Fund (DBA) , which includes exposure to agricultural products cattle, cocoa, coffee, corn, cotton, lean hogs, live cattle, soybeans, sugar and wheat, has fallen 12.5% over the past year.

The ETFS Physical Precious Metals Basket Shares (GLTR) , which is backed by a basket of gold, silver, platinum and palladium bullion, is down 27.6% over the past year. The SPDR Gold Shares (GLD) lost 23.9% over the last year while the iShares Silver Trust (SLV) fell 37.3%. [Gold ETF Flows Reveal Speculators Have Had Enough]

On the positive side, natural gas prices have been burning up as the U.S. fights off the winter chill. The iPath Dow Jones-UBS Natural Gas Total Return Sub-Index ETN (GAZ) and the United States Natural Gas Fund (UNG) are this year’s top two non-leveraged ETFs, rising 37.3% and 29.2% year-to-date, respectively. [Obama, Weather Lift UNG; More Gains Seen]

For more information on commodities, visit our commodity ETFs category.

For full disclosure, Tom Lydon’s clients own shares of GLD and SLV.

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