March 25, 2023

Strategies: For Some Commodities, a Decade’s Climb May Be Broken

Each commodity is unique, of course, with its own problems and personality. Gold retains an almost theological status among some of its adherents, who say it’s the one true store of value — yet gold’s price swings have been stunning. Oil has plenty of swagger, and its fluctuations have brought economies to their knees and countries into conflict. Copper is quietly useful and is said to convey so much information about global trends that it is called Dr. Copper — the commodity with a Ph.D. in economics.

Yet despite many idiosyncrasies, commodities have been moving largely in the same direction. With some exceptions and interruptions — notably, during the financial crisis — all of these finite resources rose in value for a decade or so. And at least for the moment, that overriding trend appears to have been broken.

What is striking is that a broad market consensus has rapidly emerged: that the immediate prospects for many high-flying commodities have grown appreciably bleaker.

“I see further declines ahead for most commodities,” says Julian Jessop, chief global economist and head of commodities research for Capital Economics in London.

In reports this month, a host of investment banks and brokerage firms have said that a range of commodities is caught in a downdraft. Edward L. Morse, global head of commodities research at Citigroup in New York, said he “expects 2013 to be the year in which the death bells ring for the commodity supercycle.” This, he wrote, should be the first year “in over a decade in which, broadly, commodity prices end the year lower than when the year started.”

Already this year, many commodities have built up deficits. Gold is down 16.3 percent, while silver, its less glamorous sidekick, has fallen 23.1 percent. Copper has lost 13.3 percent, and oil, 4.3 percent. The S. P. GSCI index, which tracks a basket of commodities futures contracts, is down 7.5 percent.

If commodities don’t recover together by year-end, it would be a significant reversal. From 2000 through March, gold prices rose 13.8 percent, annualized, compared with 10.9 percent for copper, 10.6 percent for oil and 9.6 percent for the S. P. GSCI, according to Bloomberg. That’s a reason Mr. Morse and some other analysts have called the long climb a supercycle.

David S. Jacks, an economics professor at Simon Fraser University in British Columbia who has analyzed more than 160 years of prices for 30 commodities, subscribes to this view. He says he has found a modest, 2 percent annualized price increase since 1950, adjusted for inflation. But he discerns supercycles within this trend. After roughly 15 years of generally upward movement, he believes that we have entered a phase of declining prices.

Like Mr. Morse and Mr. Jessop, he says that after the Asian currency crisis of the late 1990s, the explosive growth of resource-hungry emerging economies like China’s helped set off a multiyear commodities price boom. And he says today’s apparent slowdown in China, and signs of weakness in the global economy, have contributed to the current decline.

Mr. Jacks has found tight correlations among nearly all “hard” commodities — “those that are extracted from the ground, rather than grown on it.” Part of this may be because of the “financialization” of commodities — their inclusion in indexes and exchange-traded funds that let traders place bets by pressing a button. Agricultural commodities like wheat that are included in broad indexes like the GSCI have come to share in these price movements, he says.

Because so many commodities are finite, Mr. Jacks says, population pressures and industrial growth have given prices a modest upward long-term trend that should eventually dominate again.

MR. JESSOP agrees with some but by no means all of this. While he expects gold to recover as an alternative to currencies like the dollar, he says commodities over all are likely to decline for a while.

Low interest rates and the liquidity uncorked by the Federal Reserve and other central banks helped account for commodities’ climb in recent years, he says, but asset classes like stocks now benefit more from that easy money. He says shocks from the euro zone and China are more likely to hurt commodities than equities, especially in the United States. That’s because stocks “represent a claim on the cash flow of corporations for years to come,” he says, “and those long-term flows aren’t as economically sensitive as commodities are.”

But he does not recognize the existence of commodities supercycles.

“It’s been more like a roller coaster, with booms and busts and prices moving up and down,” he says. All else equal, he says, when prices rise, demand tends to decline and supply to increase — leading to a glut. “I’m not sure that I see any cycles beyond that.”

Jeremy Grantham, founder of the Boston asset management firm GMO, sees the commodities price decline as a short-term investing opportunity for individuals and for his own family foundation, which has made major donations to organizations focused on the environment, including InsideClimate News, the nonprofit that recently won a Pulitzer Prize.

Mr. Grantham says he is making long-term buys of “good farmland and forestry and, secondly, in good stuff in the ground like oil, copper, potash and phosphate.” He quickly adds, “Skip coal and tar sands because they will be priced out of business.” Natural gas, which has been plentiful and cheap in the United States, is likely to be in high demand and climb in price, he said.

Seeing the planet as endangered by climate change, he says human ingenuity must respond fast enough to stave off disaster. In the meantime, he says, crucial commodities are likely to be in scarce supply — and he expects them to rise in value over the next decade.

“There just isn’t enough of these things,” Mr. Grantham said. “Of that I’m confident.”

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DealBook: A Year After MF Global’s Collapse, Brokerage Firms Feel Less Pressure

Jon S. Corzine, the former chief of MF Global, at a House panel in 2011.Alex Wong/Getty ImagesJon S. Corzine, the former chief of MF Global, at a House panel in 2011.

When MF Global toppled a year ago, chaos engulfed a Chicago trading floor. Customers were locked out of their accounts, later discovering that about $1 billion of their money had disappeared.

The debacle, which played out on the evening of Halloween, prompted federal authorities to immediately bear down on the brokerage firm and the broader futures trading industry.

But a year after a federal grand jury issued subpoenas and regulators vowed reforms, the largest bankruptcy since the financial crisis has begun to fade from Wall Street’s memory.

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Federal authorities have all but cleared MF Global’s top executives of criminal wrongdoing, people briefed on the matter say. The government has yet to usher in a wider overhaul of futures trading rules, save for certain piecemeal policy changes. And the profit-making exchanges that rely on brokerage firms for business still police the futures industry, presenting potential conflicts of interest.

The slowing momentum for change has provided relief for the brokerage firms that dominate the futures trading industry. The Chicago companies, which largely dodged the humbling losses that scarred Wall Street in 2008, continue to cast MF Global as a fleeting distraction rather than a permanent black eye for their business.

“We haven’t seen a dramatic change,” said Terrence A. Duffy, executive chairman of the CME Group, the giant exchange that oversaw MF Global.

But the aftermath, Mr. Duffy noted, has left some customers wary.

Farmers and ranchers traded futures contracts through MF Global to protect themselves from the price swings of their crops. While the clients have received 82 percent of their missing money, they are still owed millions of dollars.

With the prospect of a full recovery unlikely, some traders are sitting on the sidelines. Others who continue to trade are seeking added assurances that the brokerages will follow the law.

“Every conversation with clients is about safety and sanctity of customer funds,” said Mike O’Callaghan, a managing director of business development at Knight Capital’s futures business.

Futures customers — and the integrity of the industry — were dealt a further blow this summer when another firm collapsed after misusing customer money. The chief executive of the firm, the Peregrine Financial Group, attempted suicide before eventually pleading guilty to carrying out a nearly 20-year scheme to raid customers’ accounts.

The problems have taken their toll on customer confidence.

“The general tenor is fear,” said James L. Koutoulas, chief executive of Typhon Capital Management, a hedge fund client of MF Global and the head of the Commodities Customer Coalition, a group of customers fighting for the return of their missing money.

Mr. Koutoulas and other customers are eager for a reckoning. They have questioned why authorities have not taken a harder line with Jon S. Corzine, the former chief executive of MF Global. Criminal investigators have largely concluded that chaos and porous risk controls at the firm, rather than fraud, led to the disappearance of the money.

“You can’t raid customer accounts and get a slap on the wrists,” Mr. Duffy said. “There needs to be stiffer penalties.”

MF Global executives might still face legal repercussions. The Commodity Futures Trading Commission, the industry’s federal regulator, could level an enforcement action against Mr. Corzine, even though such an action would be weeks or months away.

“It must be frustrating to people not to have a final outcome for what may appear to be malfeasance,” said Bart Chilton, a commissioner at the agency. “But investigations take time and we need to ensure that we’ve done a thorough review.”

As authorities continue to build a regulatory case, a Congressional investigation into MF Global’s collapse is drawing to a close. The chairman of the House Financial Services Committee’s oversight panel announced Wednesday that he would release an investigative report about MF Global in the next “few weeks.” Randy Neugebauer, Republican of Texas, said the report would serve as an “autopsy of how MF Global came to its ultimate demise and what policy changes need to be made to prevent similar customer losses in the future.”

MF Global was also a topic of conversation Wednesday at an annual industry conference in Chicago. Futures firms there planned to discuss new ways to protect customer cash and restore confidence in their industry.

A regulatory effort, while incomplete, has generated new measures that aim to protect customer funds.

The CME Group, which has started a $100 million protection fund for farmer and ranchers, has stepped up its surprise audits of brokerage firms. The CME and the National Futures Association, another self-regulatory group, also championed the so-called Corzine rule, which forces top executives to approve any transfer of more than 25 percent of the funds sitting in a customer account. And last week, the trading commission voted unanimously to propose new customer protections aimed at closing loopholes.

For their part, many MF Global employees remain chastened by their firm’s collapse. Lawmakers hauled Mr. Corzine, a former senator from New Jersey, to Washington three times to testify before Congressional committees. Some MF Global employees remain unemployed while others took major pay cuts to work for the trustee unwinding the firm’s assets.

Several MF Global employees planned to gather on Thursday for drinks at a Midtown Manhattan bar, just blocks from their old firm, to commiserate on their trying year. They canceled the event after another disaster, Hurricane Sandy, left some people stranded without power.

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Italy Rejects S.&.P. Downgrade

Late Monday, S.P. cut the rating by one notch to A from A+, citing the country’s weakening economic growth prospects and higher-than-expected levels of government debt.

The agency said Italy’s fragile governing coalition and policy differences in Parliament would continue to limit the government’s ability to respond decisively to economic head winds. It also cast doubt on whether the government’s projected €60 billion, or $82 billion, in fiscal savings would be realized because growth prospects are weakening, the budgetary savings rely on revenue increases, and market interest rates are anticipated to rise.

Prime Minister Silvio Berlusconi’s office issued a statement early Tuesday noting that his government had a solid majority in Parliament. It said the government was preparing steps to lift growth and recently passed measures to control public finances through tax increases and spending cuts.

“The evaluations of Standard Poor’s seem dictated more by behind the scenes reports in newspapers than reality and seems influenced by political considerations,” the statement said.

The yield on Italian 10-year bonds was up slightly by midday Tuesday, but at more than 5.6 percent Italy’s borrowing costs are more than three times what Germany, the euro-zone anchor, pays. Stock markets in Europe also brushed off the downgrade, as investors reacted to positive signals on discussions about aiding Greece, and Spain sold another offering of Treasury bills.

Analysts said the mood was also helped by speculation that the United States Federal Reserve would approve a new program for monetary easing Wednesday to try to stimulate economic growth.

The Euro Stoxx 50 index of euro zone blue chips was up almost 2 percent at midday. The FTSE 100 in London up about 1.5 percent, as was the main index in Milan. Futures contracts on the Standard Poor’s 500 index suggested a firmer opening on Wall Street.

S.P.’s A rating for Italy is still five steps above junk status, but it is three below that given by another agency Moody’s Investors Service, which is currently assessing Italy.

“Moody’s announcement to extend its review of Italy’s rating by another month last Friday probably gave the market a false sense of relief, especially after persistent speculation of a Moody’s downgrade last week,” said Colin Tan, an analyst at Deutsche Bank.

He added that although Italy had covered 77 percent of its 2011 debt funding needs, but there was still another €100 billion more to be raised before the end of the year.

Italy is the euro zone’s third-largest economy behind Germany and France and is considered to be too big to save should it run into the same kind of trouble that beset Greece, Portugal and Ireland. Although its budget deficit is relatively low, the big concern among investors is that Italy, whose debts stand at 120 percent of its gross domestic product, will find it increasingly costly to borrow.

As a result, the European Central Bank has been helping, buying around €5 billion to €10 billion in the riskier euro-area bonds over the last five weeks. But even that has failed to stop Italian bond yields from rising.

“The E.C.B. will probably need to do more from here,” Mr. Tan said, referring to its bond buying program.

Commerzbank said in a research note that the lengthy process of ratifying changes to the European Union’s main bailout vehicle was starting to impair the effectiveness of the central bank’s bond buying program.

In Athens, meanwhile, talks between Greece and international lenders that began on Monday were due to resume Tuesday night, according to the Greek Finance Ministry.

Greek officials described talks so far with the so-called troika — the International Monetary Fund, the E.C.B. and the European Commission — as productive, and they said that a deal may be close.

If there is an accord, the troika would then release the latest tranche of loans — which the country needs by mid-October to avoid running out of cash to pay its bills.

The Greek press published a list of 15 austerity measures that the troika was said to be demanding of the Socialist government. They included laying off another 20,000 state workers, cutting or freezing state salaries and pensions, increasing heating oil tax, shutting down loss-making state organizations, cutting health spending and speeding up privatizations.

Governments across Spain also are struggling to rein in spending. Teachers in Madrid began a three-day strike Tuesday to protest against staff cuts and longer classroom hours, news agencies reported.

Reflecting the country’s strained finances, Spain sold just under €4.5 billion in Treasury bills on Tuesday, but at a higher cost. The average yield on the 12-month bill rose to 3.591 percent, compared with 3.335 percent the last time, the securities were sold on Aug. 16, while the 18-month debt yielded 3.807 percent, compared with 3.592 percent last month.

Amid the wreckage of a collapsed housing bubble and weak economy, the latest data from the Bank of Spain showed that the ratio of non-performing loans continued to rise in July, reaching 6.9 percent of all loans. Analysts noted that the level was comparable to that of the previous banking crisis in the early to mid-1990s.

In an interview published Tuesday in the Spanish newspaper Expansion, the E.C.B. president Jean-Claude Trichet said that while Spain’s financial situation has improved considerably, policymakers must remain alert, Reuters reported.

He also said the outlook for the economy had deteriorated and that there were downside risks to growth.

“We conclude from these comments that Mr. Trichet is still envisaging that there could be a rate cut in the future, but for now he is keeping his powder dry,” said Julian Callow, chief European economist at Barclays Capital.

Elisabetta Povoledo contributed reporting from Rome.

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