Commodities are out of the starting gate…

Throughout the summer we’ve been banging the commodity drum as loudly as we can as regular readers will be aware. Quite simply, we believed commodities had plunged too far into oversold territory, as QE-fuelled investors had driven up bond and stock prices, while trashing the non-interest bearing raw materials, precious metals especially. At the very least a corrective rally had to occur, and sure as eggs are eggs, it came about with the FTSE 350 Mining index rallying by nearly 20% during July and August. Key question now however is can the gains be built upon?

For those who got in early (including us!), the returns have been fantastic, but there is every indication that this upwards movement has further to go. The US economy is showing signs of gradual improvement and there have even been positive numbers out of Europe and China in recent weeks. In other words, the fundamental backdrop looks  as if it will sustain and indeed extend the recent gains.

For a third month in a row, commodities beat every other asset class from stocks to bonds to the dollar. This has been the longest winning streak in two years. As measured by the iShares GSCI Commodity index, commodities rose 8.9% in the last three months while the S&P 500 declined 4.6%. Oil has been the best performer in the period with WTI and Brent surging higher by 16.3% and 13.7% respectively. Increasing prospects for a global recovery certainly have had a positive impact on oil but what really drove the surge was the expectation of an escalation in the conflict in Syria. With the US on the brink of yet another armed intervention in the Middle East, once again investors are concerned about potential disruptions to the oil supply.

Unsurprisingly, the uncertainty caused by pending conflict has helped push gold higher in more than one way.  On the one hand rising energy prices are a key factor in increased inflation, which, of course, is traditionally best hedged against through gold holdings. On the other hand, the prospects of war simply cause investors to head for a safe haven, again something which gold is synonymous with.

Gold miners benefitted the most from the latest gold rally. The most popular ETFs, Market Vectors Gold Miners (GDX) and Market Vectors Junior Gold Miners (GDXJ), rose substantially over the last month. Being a leveraged bet on gold, gold miners always rise and fall  in a magnified form more than gold itself and thus, while gold rose 6.6% in August, the gold miners rose 9.9% and the juniors recorded a stunning 23.1% rise.

Silver was the best performer among commodities during the last 30 days with spot prices rising 21.6% from deeply oversold conditions. Its hedging qualities combined with its industrial uses made this metal a real winner. With the eurozone finally starting to emerge from the most prolonged recession in its history and China revealing better than expected growth, it appears that the market is in fact now anticipating a surge in silver demand.

All in all, the strength in commodities that is now occurring comes at an ideal time for those active in the market. Global bond and stock markets have been showing signs of saturation in recent months and in no-one’s eyes are cheap. Further weakness in these seems far more likely than renewed rises as the Federal Reserve is set to announce its much anticipated taper shortly. This will almost certainly push bond yields higher, as the largest buyer starts to withdraw its support. Equally, the stock market is likely to feel pressure as a result of this as companies start to find their financing costs on the rise.

Even after the recent rally, we believe there is still time to profit from the increasingly hot gold market. Gold miners are still down near 40% YTD and the gold price is still mildly just above the marginal production cost (estimated at $1,275/oz). We believe this rally has only just started and a significant move higher can be looked forward to, going into 2014.

At Titan we have 2 funds which have been created especially to take advantage of movements in commodity stocks and related instruments. If you’d like more details then click the image below.