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Will The Commodities Sell-Off Continue In 2016?

January 13th, 2016

time to sellTony Daltorio:  The two major financial headlines in the first week of 2016 surrounded China and oil.

I recently gave readers my thoughts on all the major emerging markets, including China.

Now I want to do the same for the commodities markets, which I have been following since the 1980s. I will start with the soft commodities, then look at the metals, and finally energy.

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Soft Commodities

Actually, soft commodities are the commodities that I think have the most long-term upside.

Both cocoa and coffee have very strong stories on the demand side. Demand from the emerging world, despite the turmoil, continues to grow. The Chinese, for instance, are developing a real taste for both coffee and chocolate. Meanwhile supplies, particularly for cocoa, grow increasingly iffy.

Investors can play this trend through two exchange-traded notes – the iPath Bloomberg Coffee Subindex Total Return ETN (NYSEARCA:JO) and the iPath Bloomberg Cocoa Subindex Total Return ETN (NYSEArca: NIB).

Grains

The other softs – which include grains such as corn, wheat and soybeans – have had a terrible past three years on a price basis. Abundant crops in the Americas have been the result of favorable weather patterns such as El Niño.

But there is a very real possibility than the current El Niño will switch to a La Niña. This weather pattern is characterized by blazing hot summers and drought in grain-growing regions in the Midwest.

It may be worth looking at the ETFs that will benefit from a rise in grain prices in 2016. There are a number of them, including the offerings from Teucrium Trading. These include the Teucrium Corn Fund (NYSEArca:CORN), the Teucrium Wheat Fund (NYSEArca:WEAT) and the Teucrium Soybean Fund (NYSEArca:SOYB). One drawback is that these funds have rather high fees.

Precious Metals

Both gold and silver interest me. One saw the value of gold in this past week of stock market turmoil. It is a wonderful insurance policy against calamity. But one has to be cautious. Wall Street loves to hate precious metals. In other words, they love shorting gold and silver and knocking them back down when they make too much headway.

Both platinum and palladium are avoids. Both are too reliant on now-faltering industrial demand.

Base Metals

Avoid all base metals – copper, nickel, zinc, lead, tin, iron ore, aluminum – until either ignorant management wakes up and curtails output sharply, or one of the big five global miners goes belly up.

The former is very unlikely to happen. Look at iron ore. China has said steel production has permanently peaked. Yet leading miner Rio Tinto PLC (NYSE:RIO) is saying the Chinese don’t know their own business and are forecasting huge output increases.

The latter is a very real possibility, however, with both Glencore PLC (OTC: GLNCY) and Anglo American PLC (OTC: NGLOY) likely bankruptcy candidates.

In other words, the vast overcapacity has to be eliminated one way or another. When that happens, the survivors should prosper.

Natural Gas

The one word that best describes energy is: ugly.

Natural gas is a definite avoid. I’m sitting right in the middle of glutland, otherwise known as the Marcellus Shale region of western Pennsylvania. Companies are being forced to sell natural gas from the Marcellus at even lower prices than the depressed Nymex gas prices.

There’s no hope over the near term either from liquefied natural gas exports. Asia, where demand was once soaring, is demanding less LNG. Some countries there are simply switching back to cheaper domestic coal. That’s not good when LNG exports from both the U.S. and Australia are just getting set to expand.

Oil

Finally, no look at the global commodities sell-off would be complete without a discussion of oil. The question everyone is asking is when will this precipitous decline end?

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NYSE:JO, NYSE:NIB, NYSE:USL, NYSE:WEAT


 

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