Article / 04 November 2015 at 13:00 GMT

Metals and energy recovery stays elusive

Chief Investment Officer / ACIES Asset Management
Switzerland
  • Trend followers who have stayed short have had a good ride
  • Worst performing markets since 2011 are crude oil and natural gas
  • Gasoline is exceptional by losing only 5% since 2011
  • Palladium's VW-impacted recovery hardly alters long-term decline
  • Signs of recovery are conspicuously absent across the board
  • Strategies are: stay short, sell short into rallies, or stay away altogether

Refinery
 Gasoline, down only 5% since 2011, is exceptional in having lost so little. Photo: iStock


By Andreas Clenow

Metals and energy commodities have been in a brutal bear market for years. It's been nice for trend followers who were short most of the way, but bear markets are always more difficult for investors than bull markets. It would be nice to see this sector turn around and rise again. Sooner or later it will happen, but signs of recovery are still absent.

Let's start with the big picture. The chart below is designed to show what's going on in the sector. This chart shows developments in five energy markets (shades of green) and five metals markets (shades of blue). Note that these are futures markets, so the cost of carry is taken into account. This is the real return realised from a futures trader's point of view.  All of the markets are rebased to 100 at the start of 2011.

Energies and metals futures since 2011
Energies and Metals

Source: CSI Data

Take a close look at that chart. It says a lot about the sector. First, you have an outlier at the top. That's gasoline. For a long time, gasoline massively outperformed other energies, and that was almost entirely driven by the term structure. 

Unlike other markets in the sector, gasoline was in backwardation for a long time while the others were in contango. What a difference the term structure can make. Of course, when gasoline turned into contango as well, it fell like a house of cards.

You'll also find two energy outliers at the other end of the spectrum. The two worst performers were crude oil, down 60%, and natural gas, down 70%, over the period. Those are pretty steep drops. Remember that if a position loses 70%, you need to gain 333% to get back to even.

Among the blue lines for the metals, palladium and gold only lost slightly less than 30% since 2011, making them the best performers in the sector. Copper, platinum and silver all lost around 50%.

The only market in the sector even close to breaking even is again gasoline. It has only lost 5% since 2011. While it's been a nice ride for long-term trend followers who have stayed short for most of the declines, it would be good for everyone if we could see an end to this bear market.

Every time gold or crude rallies 10-15%, pundits call an end to the bear market and proclaim a start of a new glorious bull run. The problem is that when something has lost half its value, a little counter rally of 10-15% doesn't really change much. 

Look at the last bit of the charts, the bit to the far right. The strongest recovery of all has been in palladium — a tiny market heavily impacted by the Volkswagen story. And even that only barely put a dent in the long-term decline.

It would be great to see energies and metals recover, but so far there are absolutely no signs of that happening. 

That leaves three viable strategies. You can stay short for a very long-term trend-following trade. You can wait for short-term rallies and sell short into them. Or, you can simply stay away, pick another sector to trade and wait for this one to settle down and eventually regain strength.

Bear
 Brutally bearish for years. Photo: iStock



— Edited by John Acher


Andreas Clenow is principal of ACIES Asset Management

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