Home' Trinidad and Tobago Guardian : November 21st 2013 Contents This week, we, at Bourse, review
the performance of the com-
modities market and consider
the outlook for this interesting
yet less understood asset class.
Specifically, we take a closer
look at two major areas of interest to the local
investor: gold and energy, as well as their outlook
for the remainder of 2013.
The Thomson Reuters/Jefferies CRB Index
(TR/J CRB Index), which tracks the performance
of a basket of commodities (39 per cent energy,
41 per cent agriculture, and 20 per cent metals),
gives a high-level view of the very broad com-
modity markets. Exhibit 1 highlights the Year
to Date performance of the index, which expe-
rienced modest gains early in Q1 2013. By the
end of the first half of the year, the index was
down 6.57 per cent and year-to-date the index
has declined by 8.1 per cent.
The market moving news has come mainly
from a slowdown in Chinese demand, contin-
uing Eurozone uncertainties and speculation
around the US Federal Reserve's future policy
In comparison for the same time period in
2012 the index registered a 6.8 per cent decline;
the general performance of the overall com-
modities market can best be described as soft
but not poor.
Commodities sector review and
Gold has traditionally been the sub-asset
class of choice as both a safe haven during
periods of economic crisis and a preserver of
real wealth, acting as an inflationary hedge.
Investors tend to buy gold in times of heightened
uncertainty, as well as periods in which inflation
threatens to erode purchasing power. The oppor-
tunity cost of holding gold can be considerable,
with no periodic cash flows (dividends/interest
Successive rounds of stimulus action and
very accommodative monetary policy, however,
have led to significant interest rate declines.
Reduced rates stemming from these policies
made gold attractive as they reduced the oppor-
tunity costs of holding gold.
Combined with the inflationary risks of
increasing liquidity in financial markets, gold
has been on a significant rally since 2008, up
88.6 per cent at the end of 2012.
For a comparable period, inflationary expec-
tations have been muted. Additionally, quan-
titative easing has pumped significant liquidity
into financial markets, catalysing asset prices.
The gold market has been increasingly volatile
with expectations of the Federal Reserve's loose
monetary policy fading in the near future.
The market for gold and traders in general
will continue to monitor Federal Open Market
Committee's (FOMC's) actions and statements
to determine when and how the Fed will begin
to move away from its quantitative easing posi-
Reduced levels of global demand---in par-
ticular demand from the Asian region---have
also had a negative impact on gold in recent
months. India, the world's largest gold consumer
recently increased import duties on gold to
eight per cent in an effort to reduce gold imports,
a significant contributor to India's current
Indian officials have indicated that further
action may not be taken as recent steps have
already had considerable effect. China's reduced
demand amid softening economic indicators
has also put pressure on gold prices. Exhibit 2
shows the Commodities ETF Performance YTD.
As observed, gold prices have declined 24.71
per cent for 2013. In comparison, gold enjoyed
an increase of 3.91 per cent during 2012. This
indicates that the demand for gold may be
changing as expectations on Federal Reserve
monetary policy lean towards increasing interest
While gold prices are expected to decline
over the near term as perceptions of the US
improve, the medium term is less certain. The
Federal Reserve has indicated that it intends to
taper' its activities which have increased liquidity
in markets, but not to reverse it.
As a result, liquidity may remain in the finan-
cial system, potentially fueling increases in
inflation. If inflation does rear its head, there
could be a rush to gold.
In addition, any perceived weakness in eco-
nomic data and financial markets could lead
to increased investor appetite for the precious
OPEC's September production output reg-
istered at its lowest since October 2011, when
the group produced 29.81 million bpd, according
to Reuters surveys, and leaves supply of 70,000
bpd above its output target of 30 million bpd.
The organisation again lowered the forecast
demand for its crude in the fourth quarter and
2014 in a monthly report, stating that production
remains higher than next year's expected
demand despite declines in key producing
nations such as Iraq and Libya.
Positive developments at establishing a diplo-
matic resolution on the thorny issue regarding
Iran's nuclear ambition and the US-led sanctions
regime point to changing supply-side dynamics
in the crude market.
Currently, this particular situation is keeping
more than one mb/d of Iranian oil off markets.
As and when a compromise can be reached,
the resultant addition to world oil supplies will
likely weigh on oil prices.
Historically, crude oil prices and treasury
yields are positively correlated, with investments
in oil often viewed as a hedge against inflation
(similar to gold). The impact of the Federal
Reserve reducing its quantitative easing strategies
is a resulting future increase in interest rates
which may create positive momentum for oil
The recent energy sector performance thus
far is an instructive example of the effects of
supply and demand on commodity prices with
North American crude oil and natural gas pro-
duction both increasing during 2013. WTI Oil
YTD decreased 0.31 per cent compared to a
decline of 3.80 per cent for 2012. Volatility
remains low thus far for 2013, when compared
to historical data and supports the recent price
Additionally, the US is becoming significantly
less dependent on oil imports, as demand has
been flat to falling over the past four years,
with the latest US Department of Energy
monthly data suggesting that quarter-on-quar-
ter seasonally adjusted oil demand fell by an
annualised rate of 3.5 per cent in Q4 in 2012.
Natural gas spot price performance YTD
decreased 7.88 per cent compared with a
decrease of 8.19 per cent in 2012. Declining
production and supply coinciding with increased
demand in early 2013 drove the price to a high
In particular, the first half of the year was
marked by extended, colder-than-normal
weather in temperate climates.
Production of natural gas in the Gulf of Mex-
ico had disruptions during the 2013 hurricane
season and forecasted colder temperatures
towards the end of this year and early 2014 are
expected to increase natural gas demand.
Recently, however, natural gas extended losses
and was poised for a third weekly drop in four
weeks amid speculation US inventories will be
sufficient to meet winter demand.
US gas stockpiles totalled 3.577 trillion cubic
feet in the seven days ended October 4, 1.6 per
cent higher than the five-year average. In the
medium-to-longer term, commercial production
of Shale gas will play an important role in the
direction of natural gas prices.
Taking a position in commodities
Exchange Traded Funds (ETFs) are the most
convenient and cost effective way for investors
to gain direct exposure to commodities and
add value to their portfolios. ETFs track the
performance of commodities by attempting to
mirror the performance of a specific index or
They are traded like stocks and are thus sub-
ject to price volatility. Investors can choose spe-
cific directional ETFs, depending on their outlook
for the respective commodity.
For investors willing to accept indirect expo-
sure to commodities, commodity-related com-
pany securities provide an attractive alternative.
Investors can choose from a variety of equity
and fixed-income instruments of companies
whose fortunes are intertwined with develop-
ments in commodities markets.
In particular, the stocks and bonds of com-
panies who operate in the oil and gas industry
as well as in precious metals mining tend to
experience volatility commensurate with their
underlying assets. In short, the exposure gained
to commodities markets through these securities
is significant, albeit indirect.
While commodity ETFs can provide investors
with added diversification and enhance their
portfolio returns, investors should only purchase
ETFs after thorough research and consultation
with a qualified investment adviser. Investors
should always consult with their investment
provider of choice to explore the many ways
to participate in the commodities market.
BG22 | COMMENTARY
BUSINESS GUARDIAN www.guardian.co.tt NOVEMBER 2013 • WEEK THREE
Bourse Securities Ltd
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