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Commodities set to rise: ETF Securities

Dec 09, 2013 | 12:23 PM |

Tags  commodities, ETF Securities, Nicholas Brooks, copper, gold, exchange-traded funds, Andrea Hotter

NEW YORK — Investment in commodities will pick up in 2014 as investors switch from equities into the often neglected asset class, which has been underperforming over the past year, an executive at ETF Securities Ltd. said.

This scenario is based on the assumption that global growth will continue to recover, ETF Securities’ head of research and investment strategy Nicholas Brooks said in an interview in New York.

"We believe that 2014 will be a better year for commodities in that while investors are still focused on equities, in many cases those equities, particularly in the U.S., are looking pretty stretched," he said.

According to Brooks, industrial metals—particularly copper, but also platinum and palladium—are "abnormally low" for the current economic cycle.

"As next year progresses, investors will turn and begin focusing back on commodities once again," he said.

Attributing commodities’ current role as the "ignored" asset class to lower prices and returns relative to equities, Brooks said investors "dropped every other asset class and are spending most of their time focused on trying to eke out as much gain as they can from equities."

But mining equities haven’t fared particularly well either.

"Part of the issue is that historically there have always been issues about some of the management of some of the mining companies, and also without commodity prices performing it’s somewhat difficult for the mining companies to perform, so it’s all been tied together," Brooks said.

The worst of the outflows from commodities occurred in the second quarter, he said. But this has since moderated and, in some cases, quite strong inflows are being seen.

Copper has attracted renewed investment money, along with coffee and natural gas, he added.

In the background is the speculation on when the U.S. Federal Reserve will begin to reverse its low interest rate policies and taper its $85-billion-per-month bond purchase program. This will inevitably impact currencies, with dollar strength bearish for commodities.

"We haven’t been arguing it’ll be a ‘shoot the lights out’ year because we’re not anticipating a weaker dollar, but at the same time we don’t think dollar strength is going to be as significant in 2014 as it has been in 2013. I think most of the positive news on the U.S. economy is factored into the price," Brooks said.

"I feel relatively confident that if I look out a few years, prices are going to have to be higher than they are today, because if they’re not you’re going to see some very aggressive shutdowns or production cuts across a wide range of commodities, and that should drive prices higher," he added.

Physically backed exchange-traded funds (ETFs) for industrial metals have failed to attract much interest, with investors instead showing a preference for futures tracking products.

"You can find a wide range of investors trading long or short gold ETFs, but industrial metals tend to be more specialist, so you see lower trading volumes in industrial metals ETFs versus the physical precious metals," he added.

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