Dave Fry is the founder and editor of ETF Digest, a subscription-based newsletter that focuses on technical analysis of the ETF market. His picks and pans, driven by trend-following analysis, include a close review of the commodities market.
Dave spoke with the editors of HardAssetsInvestor.com about the outlook for the commodities market in 2009.
HardAssetsInvestor.com [HAI]: What should commodity investors expect in 2009?
Dave Fry, editor, ETF Digest [Fry]: Well, I will stick to my long-held commitment: I don't make forecasts. I don't think it's a profitable thing to do.
Instead, I'm a trend follower. I go with the trends. And right now, in the commodities markets, the trends have been down and it has been profitable to be short. I think, however, that we're probably at a turning point of some kind. When I look at commodities from a technical point of view, most commodities are forming what I might call a "diving board" platform: They are starting to move sideways, working off their oversold conditions. From here, they could either spring higher, or spring lower.
HAI: So what was your advice to investors in 2008?
Fry: Well, 2008 was a Matterhorn year for commodities. We had sharp rallies in most commodities in the first half of 2008, and then a fall. Investors need to follow those trends. If you were able to get out anywhere near the top this summer by following the trends, you were able to lock up nice gains and get short in some areas.
Unfortunately, for ETF investors, it can be pretty hard to short some commodities or commodity-related ETFs, such as the Market Vectors - Steel ETF (NYSE: SLX). If you're not an institutional investor, you can't really short them. And there, you just have to stand aside. It's the best you can do.
HAI: So what are you telling clients to consider now?
Fry: Well, with the exception of oil and perhaps coal, we're in a trendless period as I mentioned earlier: the diving board formation. We're just moving along at the bottom, trending sideways, waiting for demand to increase to support these commodities.
The different commodities have different outlooks. In the spring, we'll hit the growing season in grains, and people will be sensitive to that, so volatility will increase in Agriculture markets.
In Industrial Metals, copper is the key, and we're waiting to see if it can find some kind of base. I thought it would hold at $150, but it went to $125. People in the market refer to copper as "Doctor Copper," because it's such a critical metal. When people want to know what the economy is doing globally, they look at copper, and right now it has not been looking very good.
With crude oil, I don't know what to say about it. They keep cutting production, and people keep cutting consumption. Until consumption increases, I think oil will probably just stay flat. Some people are calling for $25/barrel oil. We'll see.
HAI: Is there anything that is attractive right now?
Fry: Gold is making a move and has been trying to make a move, but it's primarily because of currency issues. Gold in general moves inversely to the dollar, and with the dollar under pressure ... Of course, gold is being constrained by oil prices, which continue to fall, and no doubt by a lot of central-bank selling. Still, overall, people are not trusting conventional investments, and are very worried about what the U.S. government and all the central banks are doing, and whether that will lead to runaway inflation. As a result, people are moving to an asset that they trust.
We have a position in gold at the moment, and that's in commodities. That's the way our technical systems are instructing us to be positioned. They are telling us to stay on the sidelines and wait for a move one way or another.
HAI: Do the systems you use to evaluate the commodities market differ from those you use to evaluate equities?
Fry: No, not really. I won't use a commodity that doesn't work historically with what I do. To use a commodity in our system, it has to trend well, and it has to have good historical data available with it. Most do, so it's easy to add commodities. But there are some commodities that I just won't use: Silver, for instance, is too choppy. Gold trends much better amongst the Precious Metals.
Cocoa is also making a good move, but I don't trade cocoa - it is the graveyard of speculators.
Be selective and look for good trending markets. Currencies are one of the best trending markets, for instance, and many are linked to commodities, such as Australia and Brazil.
HAI: What's attractive in the currency market?
Fry: The Swiss franc is attractive. And, of course, it is always thought of as a hard currency. The franc has been moving sharply higher recently, and people trust it.
The dollar doesn't look so good, although it's basing here around 80 on the U.S. dollar index. It made a very sharp move higher recently, then it retraced back down one-third of the move. People can't stand it; they don't like the dollar. But conventional wisdom has been quite wrong in the past.
HAI: Anything else you are thinking about in the commodity space recently?
Fry: Just one more thought: If Obama is going to spend the kind of money he's talking about spending on infrastructure, that would help commodity prices at least in Base Metals and Materials. A lot of people are saying that right now, and who am I to argue?