Columnist Amine Bouchentouf is a partner at Parador Capital LLC, an institutional advisory firm focused on commodities and emerging markets. He is the author of the bestselling Commodities For Dummies, published by Wiley. Amine is also the founder of Commodities Investors LLC, an advisory firm dedicated to providing insightful information on all things commodities.
European political situation
June 17 is a date that’s significant for markets as it’s when Greece will hold elections that may see politicians opposed to the country remaining in the Eurozone come into power. If that happens, the chances of Greece leaving the Eurozone will increase, and unpredictable and potentially disastrous effects will be unleashed on global markets. This uncertainty is keeping investors on edge and is contributing to the volatility we’re seeing in commodities right now.
Last month, France elected a new president who is intent on not following Germany’s drive for austerity in the European bloc. Throughout the crisis, Germany has been pushing its insolvent neighbors to cut spending and embark on austerity measures to stem the crisis. However, Germany’s austerity calls have been resisted, and the new socialist French president has promised to curtail austerity packages aimed at European economies. The fact that the region’s two major economies are at odds about solutions to the crisis is creating a political paralysis that is bringing even more uncertainty to the market and having spillover effects on commodities.
European economic debacle
In addition to the political crisis enveloping the bloc, many European countries and institutions are facing financial insolvency. In a dramatic move last week, the Spanish government essentially nationalized the country’s third-biggest bank - Bankia SA - after the latter became insolvent. Saddled with massive debt from terribly executed real estate loans (and a paralyzing slowdown in economic activity), the bank experienced a bank run that saw its customers pulling their deposits en masse. The bank could have experienced the same fate as Lehman Brothers in 2008 were it not for a massive government bailout to the tune of 19 billion euros.
It is the view of The Commodity Investor that Europe will experience more bank runs similar to what we just saw in Spain, and that the situation facing European financial institutions is dire. Saddled with bad debts and facing economic paralysis at home, many European lenders will need robust governmental intervention to avoid going belly up. Faced with this prospect, The Commodity Investor recommends a “wait-and-see” strategy before jumping back into commodity markets at large. There will be a select group of commodities that will perform well during the crisis (which I will outline below), but there is too much uncertainty in the market to make a high-conviction recommendation for commodities as an asset class at this stage.
The European problem cannot be underestimated as the engines of economic growth there have stalled as well. Let’s take a look at unemployment levels, a solid indicator of economic activity. Unemployment in Europe has reached alarming levels, with youth unemployment in Spain and Greece hitting over 50 percent. Even France and the UK have youth unemployment levels exceeding the 20 percent mark; only Germany is in a better position with 8 percent youth unemployment.
Europe dragging down the world and commodities
The economic and political crises in Europe are having a negative impact on global economic growth, and this negativity is spilling into the commodities markets. The iShares S&P GSCI Commodity-Indexed ETF (ARCA:GSG) - a benchmark that measures the performance of energy, metals, and agricultural commodities – is down almost ten percent year-to-date. Industrial commodities such as copper are down 21 percent, natural gas is down 32 percent, and aluminum is down 18 percent for the year.
Faced with European uncertainty, it’s very tough to call bottom on commodities at this stage. However, The Commodity Investor has a strong conviction that certain commodities will perform well even during, and especially after, the crisis. One of these commodities is gold. The yellow metal has recently experienced several waves of sell-offs, but they may be overdone. In times of crisis, gold tends to experience volatility similar to many risk assets; however, it quickly rebounds as investors seek its safe haven status. This was the case following the bankruptcy of Lehman Brothers in 2008, and The Commodity Investor believes this will be the case during a European breakup.
Securities Disclosure: Amine Bouchentouf is long gold.