Russ Koesterich, chief investment strategist of iShares, says that macroeconomics largely determine commodities' returns. But there's another factor, too: the level of real interest rates, which reduce the opportunity cost of holding an asset.
Real interest rates remain low, with real rates for 5-, 7-, 10-, and 20-year Treasurys below zero as of June 1.
AdvisorOne recently asked Koesterich (left), a CFA and managing director, if he believes analysis from a few months ago—"The Commodity Conundrum: Can Commodities Stay Strong Without Inflation?"—is still valid in light of current global conditions.
AdvisorOne: What's your outlook on inflation?
Koesterich: We had a view that inflation was going to remain mild and we would stick with that. I think the issue in terms of the money supply is that people need to differentiate between what the Fed did and the amount of money in the real economy.
The Fed has created a lot of money. But, up until about the middle of 2011 most of that money just sat very quietly on the balance sheet of the banks because the banks weren't lending. That did start to change about a year ago, but the important thing to keep in mind, at least historically, and it seems to be playing out the same way this time, even when the money supply starts to grow it takes a long time for that to really start to egg on inflation.
So our view has always been while we are going to see some modest price creep in core inflation you don't really have a risk of inflation getting away from you until probably the back half of 2013.
The U.S. economy is sputtering along, much of Europe is in low- or no-growth mode and China appears to be slowing. What's your outlook on global growth?
There, I think there has been a little bit of a change. Europe was going to be in recession in 2012—that's not disappointing. It be might a little worse than people expected. The U.S., as you put it, is sort of sputtering along at its 2% rate which is more or less along expectations.
I think the disappointment this year and why some of the cyclical commodities have not done very well has been that China is slowing faster than many expected. Because of that and given that a lot of the demand for commodities is coming from China … [and] from emerging markets, that deceleration in Chinese growth I think is responsible for a lot of the weakness we've seen particularly in the industrial commodities.
