LONDON, July 6 -- Commodities are in the early stages of a "price relapse" that may last through the first half of next year, said Nick Moore, head of commodity strategy at Royal Bank of Scotland Group Plc.
The Reuters/Jefferies CRB Index tracking 19 raw materials slumped almost 9 percent in the first half of this year, following last year's 23 percent rally. Such declines have been driven by macroeconomic concerns, Moore said today at a media briefing in London.
"This is a classic mid-cycle correction price relapse," said the analyst, who has tracked commodities for more than two decades. "Following a price boom, the supply side needs to catch up and this phase usually lasts about 12 to 18 months. Now we're only in the third month. By this time next year, commodities will be back as the must-have asset to have again."
Investors lost 10.4 percent net in the second quarter, as measured by the S&P GSCI Total Return Index, the worst quarterly performance in more than a year. That compared with a 4.7 percent return from U.S. Treasuries, according to indexes compiled by Bank of America Merrill Lynch, while the MSCI Index of Global Stocks lost 13 percent.
Moore said prices are likely to drop further during the summer months in the Northern hemisphere, traditionally a period of lower demand for commodities. Declining prices for industrial metals, especially aluminum, are likely to trigger output cuts at smelters that are producing at levels close to, or at, a loss, he said.
Supply surpluses, high inventories and a slowdown in imports into China, the biggest consumer of all industrial metals, are among factors weighing on prices, Moore said.
He recommended that investors should allocate between 3 percent and 5 percent of their portfolios to commodities, and favors mining equities, citing "good cash flows and attractive valuations."
Gold, having risen 10 percent this year and traded at a record $1,265.30 an ounce last month, should be owned, Moore said. "But the best of the price rise has likely been seen," he said.