A year after Citigroup Inc. declared the decade-long run of commodity gains over, wacky weather, dead piglets and Vladimir Putin have gotten in the way.
While Citigroup rang “death bells” in April 2013 for the synchronized super cycle fueled by economic growth in China, extreme weather and supply squeezes led to surprise rallies in 2014’s first three months. Coffee hit a two-year high, cattle and hogs rose to records and nickel had its best quarter since 2010. Gold rebounded from the worst rout in 32 years after Putin’s incursion into Ukraine’s Crimea region set off the biggest standoff between Russia and the U.S. since the Cold War.
Commodities are “still a powerful hedge,” Rob Haworth, a Seattle-based senior investment strategist at U.S. Bank Wealth Management, which oversees $115 billion, said in a telephone interview. “Things happen that we don’t anticipate, whether it’s an invasion in Ukraine or twice as much snow in the middle of America as we normally get. Our clients benefit from having a little exposure to protect against the unanticipated.”
Commodities topped returns for stocks, bonds and currencies, the first quarterly outperformance against all asset classes since 2012. New York-based Citigroup and Goldman Sachs Group Inc. say the rally won’t last as supply surpluses start to emerge in everything from sugar to zinc. Investors who poured $1.55 billion into gold funds this year pulled a net $66 million from all raw materials, including base metals and energy, EPFR Global data show.
Last year’s calls by the two U.S. banks coincided with an economic slowdown in China, the world’s biggest consumer of everything from copper to cotton. Chinese gross domestic product is projected to expand 7.4 percent this year, the weakest rate since 1990, according to the median estimate of 55 economists in a Bloomberg survey.
Citigroup, which called the end of the super cycle in November 2012, said in a report yesterday that the “sunset” of rising prices is marked by a breakdown in correlations between raw materials. Analysts led by Ed Morse, the global head of commodities research, said in a March 25 report that investor interest in the asset class could “re-awaken” as some commodities rise and others fall.
“We continue to believe the commodity super cycle is over,” Aakash Doshi, a Citigroup Global Markets vice president in New York, said in a telephone interview on March 28. “That doesn’t mean that there is going to be an absence of seasonality and cyclical turns in the asset market. The first quarter was driven a lot by geopolitical and weather events. Commodities will probably return to their more historical norm of behaving more disparately, but just still on a general downward trend.”
The large first-quarter gains reflected “transient shocks” for individual markets, Jeffrey Currie, Goldman’s head of commodities research in New York, said in a telephone interview on March 31. “They were basically one-off events. Before I’m going to get excited about commodities, I want to see underlying cyclical strength, and we don’t see that right now.”
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