Miners vs ETFs

If you think prices are cheap and now is the time to buy exposure, how should you do it?

2015 has not been a great one for global markets and precious metals with a collapse in commodities hit by fears that China is slowing down and the US uncertain as to whether to raise interest rates.

Despite the rout in commodities, gold and silver have held up relatively well this year, but this has not been the case for platinum and palladium.

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Generally speaking the commodity market has taken a lot of pain over the past year. If you look at the likes of gold, the highest period has been in January of this year,” said Donovan Braam, commodity trader at Rand Merchant Bank.

The growing signs of weakness in China’s economy have led investors to re-evaluate the value of a host of commodities. However, the collapse in prices is giving some investors a reason to smile. On August 24, also known as “Black Monday”, commodity prices fell due to economic concerns in China.

Commodity-driven ETFs such as the Market Vectors Steel Index ETF, Dow Jones-UBS Aluminum Total Returns Sub-Index ETN, and Powershares DB Base Metals Fund to name a few fell but a week later the commodity ETFs had recovered and their values had increased.

“In the last 12 months, some of the best-performing US ETFs were securities that gained from the fall we are seeing in commodity prices,” said Marc Ostwald, a strategist at ADM Investor Services based in Chicago. “Five of them have doubled their money”.

Resource stocks on the JSE have not been spared as they track commodity prices lower.

“They have been horrendous performers, if you look at the one-month return during September, Lonmin is down 51% and Amplats is down 28% and these are massive companies” said Michele Santangelo, Portfolio Manager at Vunani Private Clients.

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Those who are keeping their fingers crossed for a recovery such as the platinum group metals are not seeing a glimmer of hope in the near future. The metals premium over palladium is at it slowest level in 13 years following concerns over the Volkswagen emissions scandal.

Gold mining stocks haven’t been immune to the recent selloff in commodities either.

“The industry has been the loser and it’s not the miners problem it’s a global problem,” says Ian Cruickshanks, chief economist at the Institute of Race Relations.

At this point whether it’s better to hold the physical metal or the miners depends on what your risk return profile is. According to Santangelo, if you are looking to take on some serious risk you should go with the actual miners because they are far more geared to the price of the commodity.

“The risk is that the commodity price doesn’t go up or for example Lonmin goes bankrupt, says Santangelo. But if you are looking for a more stable return that will give you a rand hedge and a positive view on the underlying gold or platinum miners then an ETF would be better.

“If you have to hold gold then get the metal itself which is not exposed to the labour problems” says Cruickshanks. “In terms of currency volatility, the only currency is the dollar and that looks like it’s strengthening, so why hold gold?”

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Analysts say the uncertainty surrounding the US Federal Reserve will be a factor for commodity markets in the fourth quarter. Recently, Fed members have hinted a hike could still be on the cards this year.

The outlook for prices of raw materials and emerging markets remains bleak as banks from Morgan Stanley to Goldman Sachs Group are predicting more declines.

“I don’t see the picture improving anytime soon, so I’m pretty bearish on all commodities,” adds Braam.


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