Big Money Betting On Commodity Bear Market

Commodities have enjoyed several strong years thanks to emerging market growth and increased demand around the world. As analysts continue to tout hard assets like gold and timber, investing demand for this asset class has continued to rise. It is now recommended that investors set aside anywhere from 5-10% of their assets for commodity exposure. But while these investments have been fruitful for the past few years, a number of institutions have begin to build a bearish sentiment for the future of the commodity space [for more commodity news and analysis subscribe to our free newsletter].

“Hedge funds cut bullish commodity bets for a sixth straight week, the longest slump since the depths of the global recession four years ago, on mounting concern that economies are slowing,” writes Debarati Roy. It seems 2012 may see broad commodity indexes post their first loss since 2008, which has a number of investors worried. Analysts at Citigroup recently stated that the commodity “super-cycle” has come to an end as China’s economy begins to cool off. Experts are predicting that returns will be much more differentiated, meaning that certain commodities may outperform, but the space as a whole is not looking quite as rosy.

The question that now remains is how investors can effectively play the commodity space if indeed a bear market is approaching. Given that a broad-based strategy is not favored in today’s environment, we outline three commodities that may have a chance to outperform the rest [see also The Ten Commandments of Commodity Investing].

  • Gold: With currency debasement in the United States and a mess of a debt situation, many investors have been using gold as a safe haven. Some think gold can top $5,000 and even $10,000/ounce in the next few years, given the bleak financial situation of the states. It should be noted that gold hasn’t had a losing year in over a decade, which some take as a sign of the metal being overvalued. The physically-backed SPDR Gold Trust (GLD) is by far the most popular gold financial instrument.
  • Timber: Over the past century, timber has been one of the best performing commodities. Now, it looks like the U.S. housing market is finally making a recovery, which has allowed timber to make some serious strides. Investors can take a look at the Timber ETF (CUT), which offers exposure to producers around the world.
  • Agriculture: Economies may be slowing, and growth may be stalling, but people still need to eat. With the global population expected to grow at an alarming rate for the next few decades, agricultural commodities should see a nice jump in demand and possibly in price. Investors can take a look at the Rogers Intl Commodity Agric ETN (RJA) for broad exposure to this particular set of commodities.

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Disclosure: Photo courtesy of Carl Chapman. No positions at time of writing.

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