To find out where we’re going, let’s start by seeing where we’ve been so far. Here’s a chart showing select commodities and the S&P 500 year-to-date.
You can see that both gold and crude oil were recently outperforming the S&P 500 for the year, while agriculture and copper were both laggards.
Looking ahead to 2012, we expect plenty of volatility. But as long as the big uptrends in commodities don’t break, these pullbacks will be buying opportunities.
A commodities outlook for 2012 is also a geopolitical outlook; I can’t remember a market in my lifetime that was so dependent on political forces rather than fundamentals.
Going into the new year, we are starting off with far more questions than answers …
- Will Europe pull its financial fat out of the fire?
- In the United States, will Democrats and Republicans be able to find common ground to get the country moving forward?
- Are the central banks of the world going to cry havoc and let slip the dogs of inflation — or will they sit on their hands and let austerity strangle a wobbly economic recovery?
The answers to these questions will help define the big trends for commodities in 2012. Many people think they know the answers; but unless they’ve bugged Ben Bernanke’s limo, I don’t see how certainty on these issues is possible.
3 Emerging Trends That Could Bode Well for Bulls
However, there are big bullish trends that underlie even the political forces …
First, billions of people in China, India and other emerging markets are becoming real consumers for the first time.
Second, there is a huge infrastructure build-out going on in the developing world — a build-out that will require more and more steel, oil and aluminum.
And third, every soap-opera twist of the global financial markets makes the currencies you can’t print — gold and silver — look that much more appealing.
On a fundamental scale: With the global economy hanging in the balance, several markets have been in a consolidation pattern. These periods of consolidation are often the precursor to larger movements. But there’s no guarantee that short- or even intermediate-term moves have to be up or down.
And despite the fact that U.S. federal budgets seem to be scribbled in crayon, the U.S. dollar is showing signs of strength after years of weakness. This flummoxes many investors.
I keep saying the U.S. dollar is winning a beauty contest in a leper colony. When you notice all the bits falling off the euro, the greenback looks very attractive by comparison.
Since commodities are priced in dollars, as the buck goes up, they tend to go down. But both gold and oil have moved up hand-in-hand with the dollar at various times in 2011, so even that old guideline is written in Play-Doh.
If the big geopolitical problems of the world can be sorted out, the appetite for risk will pick up … and so will commodities of all types, right along with it.
If not — well, that’s why God invented hedge positions. Besides, the big uptrends are still intact. A significant sell-off just might be the buying opportunity you’re looking for.
The thing is, will investors have the gumption to step up and buy when the big sell-off comes? That’s one of the questions we’ll probably have answered in the commodity markets in 2012.
Still, with all that said, here is my outlook for three important commodity markets in 2012 …
Copper: When all is tallied, the global growth in copper demand for 2011 is expected to exceed the global growth in production by 380,000 metric tons. But copper prices started slumping in September. This shows investors aren’t expecting a lot out of copper in 2012.
We could see demand pick up if emerging markets — particularly China — start throwing money at infrastructure projects as a bid to accelerate slowing growth. Otherwise, copper bulls will have to pin their hopes on a rebound in the U.S. housing market (The U.S. ranks third in the world in copper consumption.) We probably won’t see either one until later in the second quarter of 2012.
Crude Oil: Crude oil is one of the most bullish commodities of the fourth quarter of 2011. And this came despite shrinking demand in the U.S. and Europe on the precipice of a political split. What’s driving oil prices is strong demand in emerging markets — China, India, Russia, Brazil, Mexico and other parts of South America, Asia and Africa.
We just saw OPEC lower its 2012 demand forecast to 88.87 million barrels per day from a previous forecast of 89.01 million barrels per day. That’s still a LOT of oil — more than a thousand barrels a second.
The fact is global demand, already accelerating in the emerging markets, probably isn’t going away in 2012 — if anything, it’s probably going to shift into higher gear. My target for crude oil in the first quarter is $119 a barrel. But we could still see big swings down as well as up in oil prices as geopolitical risk is priced into (and out of) the market.
Gold: While there’s still time for a late-year surge in gold, I don’t think we’ll see one, so my target of $1,900 by the end of the year is off the table.
We’re seeing a lot of weakness in gold right now — gold recently hit a seven-month low — especially as governments in Europe and the U.S. embrace austerity.
But austerity can be self-defeating — it destabilizes economies and currencies, and generally accomplishes exactly the opposite of what the folks in charge intend.
Meanwhile, gold sales in China and other parts of Asia are soaring, and will probably only be stoked by lower prices.
So, we could see a correction in gold in the early part of 2012, but I expect that to give way to a rip-roaring rally later on. In fact, I think we’ll see new highs in gold later in 2012.
How You Can Play These 3 Trends
Since the long-term uptrends are in place, investors can look to corrections as buying opportunities. You don’t want to buy too early — don’t try to catch that falling knife! Instead, wait for a bottom; then you can pick up sector ETFs or individual stocks.
When the time comes, bargain-hunters may want to look at funds including …
- iPath DJ-UBS Copper Total Return ETN (NYSEARCA:JJC). Like the name says, this is a bullish fund for tracking copper.
- SPDR S&P Oil & Gas Equipment & Services (NYSEARCA:XES). The funds that try to track oil prices often underperform. A good vehicle is a broad oil industry ETF like the Energy Select Sector SPDR (NYSEARCA:XLE), and an oil services fund like the XES is even better.
- iShares Gold Trust (NYSEARCA:IAU). This is similar in structure to the better-known SPDR Gold Trust (NYSEARCA:GLD), but trades at one-tenth the price. It’s a good fit for the tight budgets many Americans will have in 2012.
These are funds to buy when commodities bottom. There are other, bearish funds you can buy to ride the commodity markets on the way down, but you have to be jack-rabbit fast to get in and out of those funds properly, so I’m not going to recommend them here.
Good luck and good trades in 2012,
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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