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

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

The revolt against Baby Boomer wealth

The $3m super tax could be put down to the Government needing money and the wealthy being easy targets. It’s deeper than that though and this looks at the factors behind the policy and why more taxes on the wealthy are coming.

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

The rubbery numbers behind super tax concessions

In selling the super tax, Labor has repeated Treasury claims of there being $50 billion in super tax concessions annually, mostly flowing to high-income earners. This figure is vastly overstated.

Latest Updates

Investment strategies

Trump's US dollar assault is fuelling CBA's rise

Australian-based investors have been perplexed by the steep rise in CBA's share price But it's becoming clear that US funds are buying into our largest bank as a hedge against potential QE and further falls in the US dollar.

Investment strategies

With markets near record highs, here's what you should do with your portfolio

Markets have weathered geopolitical turmoil, hitting near record highs. Investors face tough decisions on valuations, asset concentration, and strategic portfolio rebalancing for risk control and future returns.

Property

Soaring house prices may be locking people into marriages

Soaring house prices are deepening Australia's cost of living crisis - and possibly distorting marriage decisions. New research links unexpected price changes to whether couples separate or silently struggle together.

Investment strategies

Google is facing 'the innovator's dilemma'

Artificial intelligence is forcing Google to rethink search - and its future. As usage shifts and rivals close in, will it adapt in time, or become a cautionary tale of disrupted disruptors?

Investment strategies

Study supports what many suspected about passive investing

The surge in passive investing doesn’t just mirror the market—it shapes it, often amplifying the rise of the largest firms and creating new risks and opportunities. For investors, understanding these effects is essential.

Property

Should we dump stamp duties for land taxes?

Economists have long flagged the idea of swapping property taxes for land taxes for fairness and equity reasons. This looks at why what seems fairer may not deliver the outcomes that we expect.

Investing

Being human means being a bad investor

Many of the behaviours that have made humans such a successful species also make it difficult for us to be good, long-term investors. The key to better decision making is to understand what makes us human and adapt.

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.