Hi David, I just read somewhere that Goldman Sachs is maintaining its bearish take on commodities generally, as it argues fundamentals have not changed. What is your personal outlook for commodities for next year and beyond? The last few years have been challenging for commodity returns. I'm now thinking that as a medium to long-term investor myself, it's probably time to take advantage of the low prices and pick up some natural resources funds. Thanks.

David Fuller's view

Thank you for a timely email of general interest. 

You are right; Goldman Sachs remains bearish on commodities and they have been right so far.  I suspect they are also talking their book, as is their prerogative.

The last few years have been very challenging for commodity returns, as you say.  Everyone points to China which has certainly reduced its imports of industrial commodities.  However, the main cause of a trough for the highly cyclical commodities industry is always oversupply. 

Commodity firms around the world kept increasing production because they were convinced that China’s demand for resources would continue to rise.  This is no longer the case as China transfers to more of a consumer led economy.  Additionally, exporters of industrial commodities have been able to increase supplies with the help of new technologies.  

Subscribers will be familiar with the adage: ‘Buy when there is blood in the streets.’  This is a proven, sensible strategy for medium to long-term investors, advocated by no less than Warren Buffett.  I would do so incrementally and on weakness, as we do not yet have any clear evidence that commodities have ended their bear markets.  Nevertheless, I would not be surprised if this decline of four and a half years and counting did not eventually prove to be the early stage of a bottoming out process, prior to significant recoveries as supply declines and demand increases in 2016. 

Lastly, and I have not been very good at this myself, I would commence profit taking when medium-term recoveries in commodity shares are beginning to look overextended, because this remains a highly cyclical industry.