| Sell Equities, Buy Commodities - Comparison Of Commodity And Equity Valuations 1970-2017

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17th Dec '17 by Daytona

7 comments 6309 reads

5a35ddab7121fChart_-_Comparison_of_commo

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Daytona

Premium Member

7 comments

daveinthelakes

17th Dec '17

Jeffrey Gundlach, founder of Double Line, was on CNBC in an hour long interview last week and this was his best idea for 2018. He is one hedge fund manager whose views I have great respect for.

Rather than buy individual materials he suggested an ETF, I think it was Goldman Sachs's but I can't remember. I have decided to buy into this but would welcome ideas on the best ETF.

Gundlach's idea was targetted at a USA audience and if you believe sterling will weaken against the dollar next year we in the UK may derive a nice little bonus bearing in mind commodities are priced in dollars.

Daytona

17th Dec '17

I'd never heard of Gundlach/DL, I just stumbled across the chart - I'm a sucker for long run data like this as I find it so helpful in revealing disparities which I can use for asset allocation.

There's loads of commodity funds, I've just viewed a clip of the CNBC video and you're right, he recommended the index used in the chart - S&P GSCI (formerly the Goldman Sachs Commodity Index). It's a large generalist index which is ~60% energy weighted, see
https://www.etfstrategy.co.uk/sp-dow-jones-indices-announces-sp-gsci-composition-for-2018-49376/
for details and alternatives.

I view this as a long run play, so I've no idea what currencies will do over the timescale. Short term, I guess it's a question of which currency has more bad news priced in.

Personally, I'm on hold, waiting for the next crash.

daveinthelakes

17th Dec '17

Thanks Daytona.

Of course the problem about history repeating itself in this instance is the huge change in the energy markets with shale making the USA the swing producer and that most known oil reserves will never come out of the ground with max oil demand expected circa 2027-30.

Oil majors and sovereign oil have a problem in that they need a restricted supply to max the price but also have to get it on stream in the next 10-20 years. The best evidence for this in my view is that if oil was going to average $100 over the next 20 years do we think Saudi Aramco would be having a public offering?

With oil at $60 I am having second thoughts about Gundlach's theory. Many shale plays in the States can now make money at $40, most at $50 and they will pump all they can at $60. So barring a black swan event can't see how oil gets to $80 in the next few years.

A good example of history not repeating is gold. Until recent times there were only a few major markets such as shares, bonds, commodities, property and gold. In times of trouble everyone flew to the safe haven of gold but now with the markets in options, volatility indices and inverse ETF's we don't have to fly to gold.

I think Gundlach probably appreciates this but hopes to benefit from a short term move over say 6 months? In summary I am not sure this play will succeed over say 5 years.

Dave

Dave

jonesj

18th Dec '17

Thanks for posting - this is the kind of graph that has me very interested in allocating some money with a 5-10 year horizon.
So I just had to look at the composition of that index.

2008 (Wikipedia) 78.6% Energy; 10.4% Agriculture; 6.12 % Industrial metals; 3% Livestock & 1.8% Precious metals
2017 (Dow Jones Indices) 56.2% Energy; 19.9% Agriculture; 9.7% Industrial metals; 9.23% Livestock; 4.93% Precious metals

mojomogoz

19th Dec '17

I like some commodity related investments as this is an area where you can find clearly negative capital cycle that has played out in the recent past. That said I tend not to invest on oil as I feel it is impossible to have some edge due to the crowd. My best guess is that the oil price will be significantly higher (at new peaks) at some point in next 10 years. That we reach peak production is not the point (and whether it is peak supply or peak demand is sort of the same thing as it all depends on how much it costs to produce). The key point IMO is that every barrel of oil we produce is costing more energy to extract. 50 yrs ago 1 barrel would get 100, but today we are down to something like 1 for 10 and reducing. Alt and renewable energy to solve this problem as they tend to have a lower energy return on energy, sometimes so low it is irrational that we fund it!

I reckon its best to buy equities rather than commodities (and get caught in the dynamics of the forward curve). Gundlach may need to focus on commodities due to investment permissions on his fund?

I am interested in agri as part of commodity interest but only have one agri investment at the moment (Adecoagro) and interested in recommendations of other agri names if people willing to share.

Daytona

20th Dec '17

As a starting point, have a look at the Agriculture indices and fund holdings - S&P Agriculture, Sarasin, Barings & Blackrock and, if you want to know how not to do it, Eclectica.

Thanks for the interesting points about the cost of energy - I wasn't aware of that.

ambrosia

23rd Dec '17

Rather than buy individual materials he suggested an ETF, I think it was Goldman Sachs's but I can't remember. I have decided to buy into this but would welcome ideas on the best ETF.

i never invested in an ETF, how liquid are they, can they be hard to sell in a panic

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Sell equities, buy commodities - comparison of commodity and equity valuations 1970-2017

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Daytona

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