One sure way to lose money as an investor is to buy something strictly because it keeps going up. Technology stocks proved it in 2000. Housing proved it in...
One sure way to lose money as an investor is to buy something strictly because it keeps going up.
Technology stocks proved it in 2000. Housing proved it in the years that followed.
Now, analysts are warning investors not to become carried away with commodities. Although gold, oil, metals and agricultural commodities have been breaking records and enriching investors while the stock market has been a loser, many analysts are growing skeptical.
“The price trend in wheat, oil and gold appears to be similar to the ones seen in the late 1990s for the Nasdaq, and in the mid-2000s for homebuilders,” Citigroup strategist Tobias Levkovich said last week.
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If investors were to see the prices of many commodities charted on a graph, they would see a line that shoots almost straight up over a short time period. That’s known as a “parabolic curve,” and it usually portends danger for investors — a sign of overoptimism that entices naive followers to join the herd toward the end of a cycle.
“Be wary of the commodity complex, including materials, and its beneficiaries such as capital goods and energy equipment and services,” Levkovich said. “You’ve seen fertilizer and seed companies run up ten- to fifteenfold in just a few years.”
Long term, many analysts say there is reason for commodities to be strong investments. China, India and other developing nations have been tremendous consumers of commodities. And years of expansion undoubtedly lie ahead. In addition, greater prosperity gives millions of people the ability to buy more food.
But in the short term, analysts are worried about demand slowing as economic problems in the U.S. curtail purchases of products from other countries, curbing their growth.
Under such conditions, there could be a glut of commodities on the market. Analysts worry about lemming investor behavior or too many investors buying commodity stocks and exchange-traded funds now, simply because they appear to be one of the few investments working amid a declining stock market.
Levkovich is warning investors against the broad range of commodities, noting that Europe and Japan are slowing already and that the spillover to other nations may take months to show up.
During the last 12 months, the Standard & Poor’s 500 index has declined 3 percent while the S&P 500 Goldman Sachs commodities indexes have shown tremendous surges: energy up 49 percent, industrial metals up 21 percent, precious metals up 48 percent and agriculture up 59 percent.
“The price appreciation of some commodities is supported by strong fundamentals,” but others are along for the ride, noted Barclays Capital’s commodities-research team in a recent report.
For example, nickel and zinc prices gained the most among metals recently — rising 17 percent and 11 percent, respectively, in just one seven-day stretch.
Yet they have the weakest fundamentals, the analysts said.
Without a recovery in the U.S. and Asian stainless-steel markets, the analysts see no reason why nickel’s price should be soaring.
Typically, commodity prices rise and fall based largely on supply and demand. Corn prices, for example, have hit all-time highs amid strong demand from China as well as ethanol output in the United States.
Also, as farmers convert cotton fields to grain production to capture high grain prices, the changes ultimately could leave a shortage of cotton and generate higher prices there.
Already, cotton prices are at multiyear highs, along with cocoa, coffee, silver, palladium and aluminum, according to Barclays.
With gold hitting an all-time high, not adjusted for inflation, other factors beyond supply and demand are toying with the price. Gold tends to climb amid economic and geopolitical worries, growing inflation and a falling dollar — factors currently at play.
Still, with gold hovering around $1,000 an ounce, investors chasing the rising price could be in for a shock.
“Gold is up about 18 percent in two months, and last year it was up 37 percent, while the Standard & Poor’s 500 only gained 3 percent,” said Leo Larkin, S&P metals and mining analyst. “That’s a huge run-up and it’s probably not sustainable.”
Jon Najarian, co-founder of OptionMonster, said it’s dangerous to buy now because speculators are all on the long side, rather than short side, of the trade. “When too many are on the same side, it leads to a correction that gets overdone,” he said.
Also, when investors are focused on meeting a threshold like $1,000 an ounce for gold, a sell-off of 10 percent to 15 percent is likely once the goal is achieved, Najarian said.