Commodities slide feared as replay of financial crisis

Call it the ghost of 2008.

Concerns over a global economic slowdown — especially in emerging markets — have hammered commodities, resurrecting frightful memories of their meltdown during the financial crisis.

“The fear in the marketplace now is along the lines of what we saw in 2008,” said Brad Zigler, founder of B.L. Zigler & Co., an investment consultant for institutional investors.

The Reuters/Jefferies CRB Index was down 13% last month, its biggest slide since October 2008, according to MF Global Inc.

Worries about a slowdown in China have spooked the commodities markets even more than concerns over Europe, said Daniel Rohr, a senior securities analyst at Morningstar Inc., who covers metals.

Chinese investments in fixed assets have “really driven the commodities story over the last decade,” Mr. Rohr said.

Evan Smith, portfolio manager for U.S. Global Investors’ Global Resources Fund (PSPFX) and Global MegaTrends Fund (MEGAX), expects global growth in emerging markets to slow to 3% to 4% on average, from about 5% — not enough to make up for weakness in Europe and the U.S., he said.

As a result, “[price] expectations are now being reset” in the commodities markets, Mr. Smith said.

But fears of another huge collapse in commodities prices might be overdone.

Supply shortages and demand from emerging economies should still drive prices higher over the long term, commodities bulls contend. It is a long-term trend that some have dubbed the commodities “supercycle.”

The recent sell-off is a “cyclical downturn within a secular bull market,” said Jim Rogers, the developer of the Rogers International Commodities Index, who believes chronic supply constraints will make resources more expensive.

“Bull markets climb a wall of worry and wonder,” Mr. Rogers said about the current decline.

Mr. Smith agrees. “We’ll continue to see a secular rise in demand for commodities from emerging markets [as] record numbers of people move into the middle class,” he said. Historically, such industrialization has driven consumption of basic materials and energy.

Easily accessible and high- quality sources of metals and energy increasingly are limited, Mr. Smith added. That is driving producers to operate in more “hostile” physical and geopolitical environments.

TIME IS OF THE ESSENCE

Mr. Rohr said the real issue with supply is the time lag in getting new sources into production.

“Supply has a way of responding to high prices” such as the $4-plus level copper recently reached, Mr. Rohr said.

Prices, of course, have come down, and so have resources stocks.

Most mining companies look fairly undervalued now, Mr. Rohr said in a reversal of his bearish outlook just a few months ago.

Advisers tend to agree and are sticking to their commodities allocations.

“Since 1800, whenever commodities have done well, stocks overall have not,” said Lou Stanasolovich, founder of Legend Financial Advisors Inc., which manages $400 million.

“Ten years from now, we’ll be saying [commodities] made some great numbers,” said Mr. Stanasolovich, who has clients invested in managed futures, precious metals and agricultural stocks.

Advisers who haven’t been allocating assets into commodities-based investments “may have an opportunity now to get in at decent levels,” said Tom Lydon, president of Global Trends Investments, which manages about $80 million.

Resources companies have cut debt, built up cash and are generating good cash flow, Mr. Smith said.

“The fundamentals are probably better than three years ago,” he said. Based on actual earnings, resource stocks are priced about where they were at the bottom in 2008, Mr. Smith added.

What about gold? That’s the question everyone seems to be asking now that the metal has lost about $300 from a record $1,900 an ounce this summer.

“Gold looks very attractive after the nice pullback to $1,600, which seems to be where its long-term trend line is,” Mr. Smith said.

Gold is a good core diversifier for stock and bond portfolios, Mr. Zigler said, because unlike industrial and agricultural commodities, it isn’t subject to such fluctuating supply-and-demand conditions.

But Mr. Zigler warned that last month, big investors were clearly liquidating gold and moving into dollar assets as a safe haven. Money flowing into gold ETFs also slowed, he said.

“It’s hard to say where gold ultimately may go, but certainly, we’re in for potentially softer prices,” Mr. Zigler said.

Some advisers prefer gold miners over the actual metal.

The mining stocks are selling at “single-digit [price-earnings ratios],” Mr. Lydon said.

Gold miners are “forecasting earnings assuming a $1,200 per ounce price” even though gold was over $1,600 last week, Mr. Lydon said. He expects mining companies to exceed earnings expectations when results for the third quarter come out.

Email Dan Jamieson at [email protected]