The Pros' Four Biggest Commodity ETF Bets For 2013
We asked investment strategists to share their top commodity ETFs bets for the New Year. Their picks:
Viktoria Palushaj, market analyst at CitrinGroup in Birmingham, Mich., with $60 million in assets under management: iPath Dow Jones UBS Copper Total Return Sub-Index ETN ( JJC ).
Copper prices reached near a two-month high of $8,140 a ton on Dec. 10, following news that industrial production in China -- the world's top consumer of the industrial metal -- grew strongly at an annual rate of 10.1% in November.
While China's export-dependent economy continues to struggle with weak demand from key Western markets, its manufacturing sector has avoided contracting in the past few months as a result of the $157 billion infrastructure spending bill passed in September.
China consumes about 40% of global copper output. So the government's commitment to construction and manufacturing will support copper prices next year. Also, g lobal copper demand in 2013 is expected to grow 3.4% over 2012 to 20.85 million tons. It's estimated that China alone will use 8.1 million tons.
Beyond China, strong demand is expected from Japan and Brazil. Japan continues to rebuild from last year's natural disasters, passing a fiscal stimulus bill this year to be partly used on public works projects, while Brazil plans to invest more than $30 billion over the next five years to improve its roads and railways.
With significant efforts and resources dedicated to infrastructure improvements, copper consumption should outstrip supply next year.
One limitation to copper's appreciation may be on the supply side. China -- the world's leading producer of refined copper -- is expected to expand its mining capacity in the second half of 2013, which may lead to an oversupply. Still, demand growth combined with expected continued Federal Reserve easing are likely to support metals such as copper all year.
Ron Fernandes, CEO of Avatar Investment Management in Stamford, Conn., with $800 million in assets under management: Market Vectors Coal ETF ( KOL ).
Coal is an under-loved commodity within the energy sector. Low natural gas prices and a slowdown in China reduced demand and drove valuations down in 2012.
However, natural gas prices are rebounding, China has stabilized, India is showing signs of life. Commodities are powering up and emerging markets are poised for continued solid growth in 2013.
Four countries -- China, India, Australia and Indonesia -- generate more than 60% of the total world output. China alone produces 40%. The U.S., perceived by many as a leading producer, comes in at roughly 15% of total production.
Global demand is expected to grow at 5% annualized over the next decade, more than offsetting the cut in U.S.-based demand. That steady growth will make both China and India -- the first- and second-largest global populations -- net importers of coal and provide an opportunity for U.S.-headquartered producers to build a lucrative export-driven model. KOL has little downside risk with potential to deliver a 25% return in 2013.
Nick Brooks, head of research and investment strategy at ETF Securities in London, with $29.5 billion in assets under management: ETFS White Metals Basket Trust ( WITE ), tracking platinum, palladium and silver.
White precious metals like platinum, palladium and silver, which have significant industrial usage, could benefit even as ongoing economic uncertainty is exacerbated by potential policy mistakes from global governments.
Nearly 60% of the combined demand for platinum and palladium is from the auto sector. Platinum group metals (PGMs) are crucial components for autocatalyst production. PGM prices have been buoyed by improvement in U.S. and Chinese growth and ongoing mining strikes and unrest in South Africa, which accounts for about three-quarters of global output.
Palladium has outperformed platinum recently, with eurozone weakness weighing on platinum's European diesel auto demand prospects. Palladium has the potential to further outperform given its more direct gearing to rising U.S. and China auto demand -- though futures positioning appears quite stretched and needs to be watched carefully.
While silver has returned 12% over 2012, its subdued performance in recent weeks appears to have more to do with its continued strong links to gold than its demand profile for 2013. Like gold, silver has historically been used as a currency. As the ongoing flood of liquidity from central banks threatens to erode the value of global reserve currencies, silver can provide a potential alternative investment. With over half of its demand coming from industry, mainly electronics, silver has significant upside potential if the nascent rebound in global growth continues.
Adrian Day, president of Adrian Day Asset Management in Annapolis, Md. , with $170 million in assets under management: SPDR Gold Trust ( GLD ).
The primary driver of gold has been easy monetary policy, which is positive for gold. The Federal Reserve is both "printing" money and keeping interest rates low. The recent QE4 (fourth round of quantitative easing) of buying $85 billion in bonds each month has increased the pace of money growth. Monetary policy in fact is easy around the world and likely to stay so.
In Japan, the new government is committed to a more accommodative policy and the new governor of the Bank of England has indicated he wants an even easier policy. In Europe, the stage is set for the European Central Bank to begin buying sovereign bonds with newly created money.
At the same time, global interest rates remain low. In a majority of Organisation for Economic Co-operation and Development countries, real rates are negative. Short-term rates are lower than forecasted inflation. That is positive for gold.
The major risk for gold would be tightening monetary policy, including significantly higher rates, which seems unlikely for the foreseeable future.
In China, investment demand slipped marginally in mid-year after a strong first quarter as the economy slowed. But anecdotal evidence of record exports of gold from Hong Kong to the mainland suggest gold exports are rising.
China's demand represents between 15% and 20% of world investment demand. Jewelry demand continues to increase as the economy and middle class grow. Last year, 516 tons of gold jewelry were sold in China, up from 400 the year before. India's jewelry demand has dropped from 746 tons in 2010 to just 516 last year, and this year is likely to have dropped below China's. It is unlikely there will be any significant increase in supply, absent any unexpected sales from U.S. stockpiles or other major stockpiles at the IMF (International Monetary Fund), Germany or France. Supply is expected to grow a modest 1% to 1.5% in 2013. Global gold production still remains below the levels of the early 2000s, at the beginning of this bull market.