Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 157

Commodities: has the trend changed?

On the 22 March 2016, Mr Richard Elman, Founder and Chairman of the Noble Group Limited was quoted on Bloomberg as saying:

”We all know that commodities are cyclical, but predicting when that turning point comes is only possible with hindsight, especially with such excessive moves as are currently occurring. Those who come hoping for some kernel of wisdom leave disappointed when I tell them that I don’t know how all the different factors will play out - nor does anyone else.”

It is unusual for a high-profile executive to be so frank and explain how things really are. For someone like Elman who has been involved in building a large commodities business over five decades to admit that predicting turning points in commodity prices is impossible has consequences for all other market participants. If turning points are impossible for him to predict, then it follows that predicting turning points in resource companies is as difficult, if not more difficult. As Ed Seykota famously stated in an interview:

“Commodity trading is the purest form of trading in the world and resources companies are simply a leveraged version of this.”

Nobody rings a bell

Of course, resource journalists, researchers, newsletter writers and research analysts cannot admit this ‘simple truth’ otherwise their very reason for existing would be cast into doubt. Mr Elman has the luxury of having built up a large business and five decades of experience and is a major owner of a business that has experienced significant share price movement over long periods of time.

It follows from this logic that ‘no one rings the bell at the top of a resources cycle’ because it is impossible to predict. Similarly, ‘no one rings the bell at the bottom of the resources cycle’ because it is impossible to predict. It didn’t happen at the top of the last resources boom and it won’t happen at the bottom of the current resources downward trend.

What is extremely interesting, however, it that commodities and consequently resource companies do experience significant periods of trending. This brings us to how an investor actually makes money in resource companies. The short answer is by following the trend once it has been established and exiting the trend once it has ended.

Diagram 1: ASX200 Resources Index over last decade.

Diagram 1 is a ten-year chart of the S&P/ASX 200 Resources Index. We can see a period up to 2008 when the index was trending up strongly, then a severe sell off during the GFC and a strong recovery and trend until 2011. Since 2011 the resource index has been falling for five years. Only recently we have seen an ‘uptick’ in the resources index and many of the stocks that underlie this index. Clearly the longer-term trend is down but we may be seeing the first early signs of a recovering resources sector. However, as Mr Elman points out, this is impossible to tell, but will be easy in hindsight.

Closing shorts and entering longs

How do we deal with this set of circumstances at Cadence? Having been short a number of commodities over the past three to five years we find ourselves scaling out of these short positions a bit at a time. Diagram 2 illustrates our process of scaling out of (buying back) short positions.

Diagram 2: Exiting shorts

As we exit these short positions we may find that many resources stocks have become fundamentally cheap and are starting to trend up. This process then allows us to enter small long positions and potentially scale into a longer term recovering trend (Diagram 3 below).

Diagram 3: Entering longs

Should this prove not to be the case then we would simply exit these small positions with small losses. In this way we adopt a risk-adjusted approach to determine whether the resource decline has in fact ended and the market is entering a new trend. We believe this is the only way of establishing a position.

It is very difficult to predict turning points in any stocks but particularly difficult in resources stocks. However, once a trend has been established, trends tend to last for considerable periods of time, particularly in cyclical stocks and industries.

As we write this article we know that recent price movements have at a minimum tested long-term resource and energy price trends and may be indicating a longer term change in trend. Only time will tell, but our process for dealing with these trends is well-defined. We are not professing to ‘ring the bell at the bottom’ but the bell may currently be ringing.

 

Karl Siegling is the Managing Director of Cadence Capital Limited (ASX: CDM). CDM is a Listed Investment Company currently celebrating its 10-year anniversary. This article is for general education and does not consider the individual circumstances of any investor.

 


 

Leave a Comment:

banner

Most viewed in recent weeks

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

The hidden property empire of Australia’s politicians

With rising home prices and falling affordability, political leaders preach reform. But asset disclosures show many are heavily invested in property - raising doubts about whose interests housing policy really protects.

Preparing for aged care

Whether for yourself or a family member, it’s never too early to start thinking about aged care. This looks at the best ways to plan ahead, as well as the changes coming to aged care from November 1 this year.

Latest Updates

Shares

Four best-ever charts for every adviser and investor

In any year since 1875, if you'd invested in the ASX, turned away and come back eight years later, your average return would be 120% with no negative periods. It's just one of the must-have stats that all investors should know.

Our experts on Jim Chalmers' super tax backdown

Labor has caved to pressure on key parts of the Division 296 tax, though also added some important nuances. Here are six experts’ views on the changes and what they mean for you.        

Superannuation

When you can withdraw your super

You can’t freely withdraw your super before 65. You need to meet certain legal conditions tied to your age, whether you’ve retired, or if you're using a transition to retirement option. 

Retirement

A national guide to concession entitlements

Navigating retirement concessions is unnecessarily complex. This outlines a new project to help older Australians find what they’re entitled to - quickly, clearly, and with less stress. 

Property

The psychology of REIT investing

Market shocks and rallies test every investor’s resolve. This explores practical strategies to stay grounded - resisting panic in downturns and FOMO in booms - while focusing on long-term returns. 

Fixed interest

Bonds are copping a bad rap

Bonds have had a tough few years and many investors are turning to other assets to diversify their portfolios. However, bonds can still play a valuable role as a source of income and risk mitigation.

Strategy

Is it time to fire the consultants?

The NSW government is cutting the use of consultants. Universities have also been criticized for relying on consultants as cover for restructuring plans. But are consultants really the problem they're made out to be?

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.