Crude Oil Is The Best-Performing Commodity Of 2015 So Far by Frank Holmes

Can we really be halfway through the year? That’s what my calendar tells me, which means it’s time for the 2015 commodities halftime report.

The periodic table of commodity returns, consistently one of our most popular pieces, has been updated to reflect the first half of 2015. Click on the table for a larger image.

Crude Oil

As an asset class, commodities continue to be a challenging space for investors, as they’ve faced many headwinds lately including lackluster purchasing managers’ index (PMI) numbers and a strong U.S. dollar.

Crude Oil

Crude Pulls off Coup but Faces Strong Downward Pressure

The widest expansion this year was made by none other than crude oil, the worst-performing commodity of 2014. As of June 30, oil posted gains of over 11 percent, rising to $59.47 per barrel. After falling more than 50 percent since last summer, though, it had little else to go but up. That oil claimed the top spot just highlights the reality that commodities are in a depressed state right now.

Case in point: This week, West Texas Intermediate (WTI) retreated to $50 per barrel, putting it back in the red. This move was largely in response to Greece’s debt dilemma, China’s slowdown and weakening PMI numbers. After the JPMorgan Global Manufacturing & Services PMI was released, showing a continued downtrend in manufacturing activity, oil almost immediately dropped $4. The lifting of sanctions on Iran, if approved by Congress, could also place downward pressure on WTI, with some analysts seeing it returning to the $40s range.

As the 800-pound commodity gorilla, China greatly contributes to the performance of oil. Its own PMI reading remains below the key 50 threshold, indicating that its manufacturing sector is in contraction mode. This has a huge effect on the consumption of oil and other important commodities.

The good news is that the projected crude price for the remainder of 2015 should be high enough to support continued production in drilling areas such as the Bakken, Eagle Ford and Permian basins, according to the Energy Information Administration (EIA). The oil rig count, as reported by Baker Hughes, has advanced for the third consecutive week, after 29 straight weeks of declines.

Crude Oil

King Corn Pops to the Top

We all know that corn is in practically everything we eat and drink, from soda to bread to salad dressing. It’s fed to livestock and poultry and used to make ethanol, plastic, glue and more. The grain is so ingrained in our lives that the U.S. government subsidizes it to the tune of $4.5 billion a year.

For this reason and more, American farmers favor the grain. In 2013, a record amount of corn was grown and sent to market, which resulted in a decline of 40 percent. That year it was the worst-performing commodity.

Since then, corn has found its footing and, as of June 30, the commodity is up 4.28 percent.

Zinc Is Flying off Car Lots

Sought for its anti-corrosive properties, zinc is staging a comeback and is set to make its longest run of gains in over a year, according to Mineweb.

The reason? Accelerating automobile sales in Europe. Zinc can be found in all parts of a car, from its tires to door handles, and because it can store six times more energy per pound than more conventional battery systems, the metal is also used in electric vehicles.

The European Automobile Manufacturers Association reports that demand for new vehicles is up 14 percent year-over-year in June, its largest increase since December 2009. New car registrations in most European markets are seeing double-digit growth, with Portugal, Spain, Ireland and the Czech Republic leading the pack.

Gold Demand in China Sparkles

In a much-anticipated announcement, China broke its six-year silence on the amount of gold its central bank holds. And although the number jumped nearly 60 percent from 1,054 tonnes in 2009 to 1,658 tonnes, it underwhelmed the market, as many analysts had expected almost double the amount. Bullion fell to a fresh five-year low on Friday, while stock in Barrick Gold, the world’s largest producer, plunged to a level not seen since the Bush Administration—the elder Bush, that is.

But other news out of China, the largest purchaser of gold, suggests that the yellow metal is still very much on consumers’ minds. Just-released gold withdrawal numbers from the Shanghai Gold Exchange (SGE) came in at 1,180 tonnes—a huge amount—setting a new record for withdrawals in the H1 period and leading many analysts to predict a new annual record.

Crude Oil

Gold demand in China normally cools around this time before picking up momentum in anticipation of the Chinese New Year. That demand has held up so well is a good sign for the second half of the year.

Even though gold’s down about 3 percent year-to-date, our Gold and Precious Metals Fund (USERX) is holding up. USERX currently has four stars overall from Morningstar, among 71 Equity Precious Metals funds as of 6/30/2015, based on risk-adjusted returns. This is a testament to the management skills of portfolio manager Ralph Aldis and our team of analysts.

The MoneyShow San Francisco

Right now I’m in San Francisco attending the three-day MoneyShow conference, where I’ll be presenting tomorrow. If the Bay Area isn’t in your travel plans, you can always watch the presentation live on your computer, tablet or smartphone by registering at eMoneyShow. The event will be available on-demand until August 8. I hope you can join us!

Index Summary

  • The major market indices were up this week. The Dow Jones Industrial Average rose 1.84 percent. The S&P 500 Stock Index rose 2.41 percent, while the Nasdaq Composite rose 4.25 percent. The Russell 2000 small capitalization index rose 1.20 percent this week.
  • The Hang Seng Composite rose 2.06 percent this week; while Taiwan rose 1.48 percent and the KOSPI rose 2.25 percent.
  • The 10-year Treasury bond yield fell 5 basis points to 2.35 percent.

Domestic Equity Market

Crude Oil

Strengths

  • Information technology was the best performing sector in the S&P 500 this week, led by Google which rose sharply after reporting stronger than expected earnings. The S&P 500 Technology Sector Index rose 5.26 percent this week.
  • Financials also performed well this week as earnings releases pleased the markets. The S&P 500 Financials Sector Index rose 3.01 percent.
  • Health care stocks rallied this week, maintaining the momentum they gained from the Obamacare ruling. The S&P 500 Healthcare Index rose 2.23 percent this week.

Weaknesses

  • Energy was the worst performing sector in the S&P 500 as crude oil prices continue to slide. The S&P 500 Energy Sector Index fell 1.19 percent this week.
  • Consumer’s appetite is weakening, as indicated by the pullback in the University of Michigan Consumer Sentiment Index.
  • Retail sales contracted between the months of May and June, creating concern over the strength and momentum of domestic consumer-based companies.

Opportunities

  • Industrial production grew faster than expected for the month of June, a very positive sign following the prior month’s contraction.
  • The Empire Manufacturing Index, which has been particularly weak for the first half of this year, jumped up, surpassing analyst estimates.
  • With the dollar still very much elevated, domestic retailers should continue to see tailwinds.

Threats

  • On the other hand, companies with a great deal of foreign revenue exposure will continue to face headwinds from the strong dollar.
  • The Fed seems to be committed to raising rates sometime this year, a move that could catch the market off guard given the expected rates shown by the futures market.
  • China’s economic woes are not over, despite the positive data releases this week. Investors are remaining cautious.

The Economy and Bond Market

Global stocks rose broadly and with less turbulence this week as Greece accepted the new austerity plan laid out by its creditors and China reported better-than-expected second-quarter GDP growth. The U.S. housing market rebounded, while early reports of second-quarter U.S. corporate earnings surprised on the upside. Yields on 10-year U.S. Treasury notes and German bunds eased, indicating less risk aversion. The VIX, a gauge of U.S. stock market volatility, dropped back below 12 from close to 20 a week ago. The U.S. dollar index rose 1.6 percent, approaching a seven-week high, while the euro fell below $1.09. Oil prices for U.S. West Texas Intermediate and international Brent crude oil fell below $51 and $57 per barrel, respectively, on higher current supply. A landmark nuclear agreement with Iran and the lifting of economic sanctions raised expectations of additional oil supply.

Strengths

  • Headline and core CPI came in as expected in June, growing 0.3 percent month-over-month and 0.2 percent, respectively. This resulted in the year-over-year rate inching up a tenth, to 0.1 percent for headline and 1.8 percent for core.
  • Industrial production turned positive, adding 0.3 percent month-over-month in June, up from a 0.2 percent month-over-month decline in May and above the expected 0.2 percent month-over-month increase. Capacity utilization increased to 78.4 percent from 78.2 percent in May (revised up from 78.1 percent initially). This was above expectations of 78.1 percent.
  • Housing continues to build momentum as housing starts added 9.8 percent month-over-month, to 1,174,000 starts in June from 1,069,000 in May (revised up from 1,036,000). Expectations were for a more modest 6.7 percent month-over-month increase, to 1,106,000.

Crude Oil

Weaknesses

  • Disinflationary pressures from abroad continue as the import price index fell 0.1 percent month-over-month in June, down from a 1.2 percent month-over-month increase in the previous month and below the expected 0.1 percent month-over-month gain. This translates to a 10.0 percent year-over-year decline in June, down from a 9.6 percent year-over-year decline in the previous month and slightly below the expected 9.8 percent year-over-year decline.
  • The Philly Fed index fell to 5.7 in July from 15.2 in June, below expectations of 12.0. On an ISM-adjusted basis, the index fell to 49.2 from 52.0 which is below the 50-level that suggests contraction in manufacturing activity. Overall, the report, along with the recent Empire Manufacturing report, flags downside risk ahead of the national ISM report for July.
  • Retail sales declined 0.3 percent month-over-month in June, down from a 1.0 percent month-over-month gain in May. This was below the expected 0.3 percent month-over-month gain.

Opportunities

  • The release of the monthly home price index from the Federal Housing Finance Agency should demonstrate prices continue to rise at a sustainable rate despite ultra-low interest rates.
  • The National Activity index for June as well as the June leading index and July survey of activity by the Kansas City Federal Reserve are expected to maintain positive momentum.
  • Notwithstanding weak PMI readings recently, the release of “flash” readings on the health of manufacturing sectors across the globe next week will be an important gauge of the global economy.

Threats

  • The Fed and the bond market still seem to disagree about the expected path of monetary normalization. While Fed Chair Yellen’s testimony to Congress made it clear the Fed intends for an initial rate hike later in the year if the economy keeps on progressing as it is, the market’s expectation as measured by the “months to hike” indicator below is still around 7 months. This could pose a threat to the short end of the Treasury curve as it would likely correct upwards if the initial rate hike unfolds as the Fed intends.

Crude Oil

  • Second quarter earnings announcements will ramp up next week. Expectations are low, with the market discounting a low hurdle of 1 percent earnings growth for the second quarter, so there shouldn’t be any major negative surprises. Forward guidance will be more key, with the unlikelihood of an imminent profit rebound ahead.
  • Monetary easing among the dollar-block commodity producers will probably not end with this week’s rate cut from the Bank of Canada. Amid a worsening economy and falling dairy prices, the Reserve Bank of New Zealand looks poised to cut rates again at its upcoming meeting on Wednesday.

Gold Market

For the week, spot gold closed at $1,134.47 down $29.23 per ounce, or 2.51 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, lost 7.50 percent. The U.S. Trade-Weighted Dollar Index gained 1.91 percent for the week.

Date Event Survey Actual Prior
July -14 Germany CPI YoY 0.30% 0.30% 0.30%
July -14 Germany ZEW Survey Current Situation 60 63.9 62.9
July -14 Germany ZEW Survey Expectations 29 29.7 31.5
July -14 China Retail Sales YoY 10.20% 10.60% 10.10%
July -14 U.S. PPI Final Demand YoY -0.90% -0.70% -1.10%
July -15 Eurozone CPI Core YoY 0.80% 0.80% 0.80%
July -16 Eurozone ECB Main Refinancing Rate 0.05% 0.05% 0.05%
July -16 U.S. Initial Jobless Claims 285K 281K 297K
July -16 U.S. Housing Starts 1106K 1174K 1036K
July -17 U.S. CPI YoY 0.10% 0.10% 0.00%
July -23 U.S. Initial Jobless Claims 278K 281K
July -23 Caixin China PMI Mfg 49.8 49.4
July -24 U.S. New Home Sales 541K 546K

Strengths

  • U.S. Mint gold coin sales achieved a second straight monthly gain, reaching 82,000 in sales month to date versus 76,000 for all of June.
  • The U.S. Mint announced 2015 American Eagle Silver coins are sold out and is planning to resume sales in two weeks. Oddly, the announcement came on the same day the price of silver plunged to 2015 lows.
  • India is meeting stiff resistance in its drive to make buying of gold jewelry more transparent and to channel demand into paper gold to stop the metal being used to hide billions of dollars of undeclared money. The jewelry trade says Modi’s plans won’t deter Indians from buying gold to keep their wealth away from the authorities. Furthermore, dealers are set to boycott tax requirements for bigger purchases.

Weaknesses

  • Gold traders turned bearish for the second time in three weeks after Fed Chair Yellen’s testimony reaffirmed speculation that the Fed will raise interest rates this year. Further, gold fell for five straight days this week on anticipation of higher interest rates.
  • Gold is down more than 10 percent from its 2015 highs and the pervading negative sentiment is evident in the position of speculators in the futures market. The net long positioning is now the lowest since at least 2006 when gold was worth less than $600/oz.
  • Gold retreated after Greece secured a deal paving the way to a new bailout, agreeing with creditors on the reforms needed to start formal negotiations over a third bailout program in five years. The deal takes some of the luster off the need for a “safe haven” asset.

Opportunities

  • China’s gold reserves touched a record 1,658 tons by June 2015, increasing by nearly 60 percent since April 2009, according to China’s central bank. The report seems to indicate that Chinese consumers have purchased more gold than estimated over the past six years, reaffirming consumer demand for the metal remains robust. While the total gold reserves came in lower than many had expected, Ross Norman from Sharps Pixley noted that perhaps other government agencies in China may have large holdings that haven’t been disclosed. Bloomberg’s Intelligence service had expected central bank holdings to be roughly 3,000 to 3,500 tonnes.  The lower number for central bank holdings leaves a clear path for further accumulation by the central bank as the Chinese government fulfills its goal to position the renminbi as a reserve currency.
  • According to Ross Norman, CEO of Sharps Pixley and London Bullion Market Association’s top forecaster for the past 15 years, somebody big is sitting on the gold price and a relief rally when the Fed raises interest rates is a distinct possibility. He also noted that “either 5,000 years of safe haven buying has just become bunk, or there is a desire to portray what is evidently a financial and economic crisis as nothing to be concerned about.” Mr. Norman forecast a peak gold price of $1,450/oz. for 2015.
  • Over the last decade U.S. gold production has been dropping relatively consistently. 2014 was the lowest production year for that span as U.S. mine supply hit a new decade low. For the U.S., 2015 year to date has been even worse for mined gold supply as production has dropped 7.5 percent from the low levels in 2014. Thus, gold bulls may have the last laugh as the supply/demand imbalance is bound to catch up at some point, forcing prices higher.

Threats

  • Following strong housing data and mediocre CPI, wage growth and retail sales data, an unknown speculator decided to dump $1.4 billion notional in gold futures markets, sending silver prices plunging according to data presented on Zero Hedge.

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  • It seems like the “buy the dip” mantra has stopped working on U.S. equities. 2015 has had more down days in the S&P 500 Index than any year since 2002. Declines have gotten longer, averaging 1.9 days and rebounds are weakening. Another sign of weak market data, shows that the first half gain in the S&P 500 Index, was the smallest first half move in the index since 1927.  Further, clients have pulled more money from mutual and exchange-traded funds tracking U.S. shares than any time since at least 2000. Weakening resilience has been a bad sign for investors in the past, when it often preceded broader selloffs.
  • Fed Vice Chairman Stanly Fischer said that reducing the Fed’s $4 trillion balance sheet without disrupting the markets will be a challenge. Keep in mind that all maturing securities in the Fed’s bond portfolio are being reinvested in the bond market to keep rates lower than market forces would dictate.

Energy and Natural Resources Market

Strengths

  • Refiners continue to show considerable strength on the back of strong margins and high capacity utilization. The S&P Supercomposite Oil & Gas Refining & Marketing Index rose 3.72 percent this week.

Crude Oil

  • Tanker stocks outperformed this week on the prospect that more oil will flood the markets. The Bloomberg News Tanker Index rose 2.77 percent this week.
  • Dry Ships rose sharply this week on the back of a more optimistic outlook for China. The Bloomberg Dry Ships Index rose 8.67 percent this week.

Weaknesses

  • With WTI crude breaking down for another week, oil and gas drillers suffered. The S&P Supercomposite Oil & Gas Drilling Index fell 6.90 percent this week.
  • Gold and other precious metals stocks slumped this week as Fed Chair Janet Yellen emphasized the likelihood of a rate hike this year.
  • The dollar continues to remain elevated, putting significant pressure on commodities.

Opportunities

  • China M2 money supply growth and productivity growth came in higher than expected. Perhaps the Chinese economy is beginning to turn around.
  • The July preliminary reading for the Markit United States Manufacturing Purchasing Manager’s Index will be released next week and is expected to increase.
  • Refiners are undoubtedly benefiting from the wider margins and should continue to show relative strength in the near future.

Threats

  • Iran and the United States reached an agreement this week, causing many to fear that Iran will flood the market with more oil, fueling supply concerns.
  • Federal Reserve Chair Janet Yellen emphasized the likelihood of a rate hike this year. Higher rates would create headwinds for gold.
  • Copper inventories rose the most since March, fueling supply concerns. Furthermore, China’s recent economic troubles are causing concerns on the demand side of the equation as well.

Emerging Markets

Strengths

  • Czech equities outperformed this past week as political tensions ease in the region. The Prague Stock Exchange Index rose 3.37 percent this week.
  • Chinese stocks continued their rebound this week as the country’s productivity grew more than expected in the second quarter and the money supply continues to expand. The Shanghai Stock Exchange Composite Index rose 2.05 percent this week.
  • Egyptian equities rose sharply this week as oil prices collapsed, saving the government billions in energy subsidies. The Egyptian Exchange EGX 30 Price Index rose 5.32 percent this week.

Weaknesses

  • The Colombian peso, along with other emerging market currencies, weakened this week as oil prices continue to fall. The peso fell 3.03 percent against the dollar this week.
  • Ukrainian equities fell this week as the country’s economic and geopolitical crises remain unresolved. The Ukraine PFTS Index fell 1.03 percent this week.
  • Despite a temporary resolution to the Greek crisis being formed this week, the euro fell against the dollar. The euro depreciated 2.85 percent this week.

Opportunities

  • Recent stock market volatility in China might again shift investor attention towards real assets, including property.  Home prices have been recovering sequentially since April, especially in top tier cities where inventories remain lower and new supply is limited because of land scarcity.  Given the sector’s significance in generating economic activity, unchanged path of falling interest rates, and historically cheap valuation, quality Chinese property developers with more exposure to major metropolises should outperform going forward.

Crude Oil

  • One-year corporate rates in India reached their lowest level since 2010, flushing the economy with ample liquidity, which should boost economic activity.
  • The Greek government accepted the bailout proposal from the nation’s creditors. The worst appears to have been avoided and equities should rally, at least slightly, once the markets reopen.

Threats

  • Russian industrial production disappointed for the month of June. The Russian economy is slowing substantially.

Crude Oil

  • China M2 money supply growth came in higher than expected, indicating that the government’s easing policies are having the desired effect.
  • The latest rebound in Macau casinos on the back of potentially relaxed transit visa regulation and looser implementation of a smoking ban may not be sustainable, as industry fundamentals have deteriorated faster than valuation.  Despite a nearly 60 percent correction since February 2014, industry valuation remains above the five-year average.  With anticorruption movements unabated and at least a portion of middle class mainland Chinese discouraged by the stock market rout, a swift turnaround of casino revenues in Macau is a small probability event.

Leaders and Laggards

Due to a technical difficulty, the table data is not available at time of publication. Please check back on Monday.

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