Vince Stanzione’s Spread betting: Commodities are no one-way bet – merely buying and holding a commodity exchange-traded fund (ETF) will provide you with disappointing returns. However, with some canny management and switching, you can seriously enhance your returns
Vince Stanzione first turned bullish on commodities in 2000, at a time when the only other person talking about them was renowned investor Jim Rogers. The media, with the exception of the odd gold and oil quote, hardly covered them.
Today, everyone knows that China needs commodities, so they must be a sure bet, right? Well, my 24 years of investing experience tells me that when everyone ‘knows’ anything, then they are normally wrong. After all, a decade ago when I was buying commodities, the public were chasing dotcom shares.
No one-way bet
While, overall, I still like the idea of having exposure to hard assets, the problem is that, unless you can physically store your own commodities, you’re not really buying a hard asset, just another piece of paper.
So while commodity exchange-traded funds and futures (spread bets) provide short-term speculative tools – months, not years – which I have no problem in using to go long or short, the overall long-term picture on investing in commodities is cloudy, and most investors will be disappointed with the returns from investing in commodity ETFs.
The solution, therefore, should be a managed one, whereby you trade commodities both long and short and at times just stay out. Also, many people don’t realise that when they invest in commodities they are also making a currency bet on the US dollar, which remains the official commodity settlement currency. Needless to say, recent dollar strength has done commodity buyers no favours.
The 80/20 rule
I am mindful of the old 80/20 rule, which tells us that 80 per cent of the gains posted by a commodity occur within 20 per cent of the time. For example, coffee could do nothing for months on end, then make a big move over two or three months. I am not recommending day trading commodities, as that is a mug’s game. However, the ‘buy and hold’ only model is also questionable.
Take sugar as an example. If you had bought the sugar ETF when it was first launched in the UK in 2006 and just held it, you would have lost 26 per cent. Whereas with a simple managed solution, being long, short and out of sugar, you would have enjoyed a return of well over 100 per cent during the same period.
If you had bought the Rogers Raw Materials ETF (NYSE:RJI) when it was first launched in October 2007 at $ 10, you would now be sitting on a loss of more than 35 per cent, and I think you would have to wait for some years from now just to break even. Using a simple ‘buy-above, sell-below’ a 200-day moving average, while not perfect, you would have done far better.
As mentioned in previous columns, I have built up a sizeable short position in copper and other industrial metals, since I question the GDP numbers coming out of China. I have also built up on the Short All Commodities ETF (LSE:SALL), which, as its name implies, makes me short a basket of 19 commodities that forms
the DJUBS commodity index. So far this year, the SALL is up 12 per cent.
Gold, which remains in a long-term bull market, is the bright spot in commodities at present. Seasonally, gold weakens over the summer and then starts picking up again as we go into September.
One advantage of gold, silver, platinum and palladium is that even the small investor can take delivery and store physical bars or coins. Of course, you have to pay a premium to take delivery, but at least you know where you stand.
You can buy an ETF, but be very careful who the counterparty is and ask yourself, do they actually have any physical metal? Among the most respected metals ETFs are those issued by Swiss bank ZKB, which has an AAA credit rating and backs everything with actual Swiss vault-held metals.
Vince Stanzione has produced a home-study course to teach private investors how to benefit from trading financial spread bets and fixed odds. For more details, visit www.fintrader.net