Global Real Assets

A bi-weekly discussion of the recent commodity, REIT, and real asset markets and what it may mean for investors.

May 18, 2017

John LaForge, Head of Real Asset Strategy

Our Greatest Commodity Fear

  • We continue to be bearish on commodities in 2017. What could make us wrong, however, would be a significant decline in the U.S. dollar.
  • Wells Fargo Investment Institute’s base case for 2017 is for the dollar to potentially fluctuate in value, but to strengthen by year-end 2017.

What it may mean for investors

  • While the potential for a major U.S. dollar decline is a concern of ours, we are not expecting such an event. We continue to advise underweighting commodities.

“There is no man more dangerous than one who does not doubt his own rightness.”
--Louis L’Amour

No one is right all the time– especially when it comes to investing. It just does not happen. However, for nearly four years, we’ve been generally, though not always right on the direction in commodities. From our uber bearish “time-for-commodities-to-crash” call in 2013, through our “time-to-bounce, most-of-the-price-damage-has-been-seen” 2016 call, to today’s (2017) bearish stance, we are pleased with our research.

We have a laundry list of fears. At the top of our fear list is the U.S. dollar. Should the U.S. dollar become excessively weak, our 2017 bearish commodity call could be quite wrong. This is our topic today.

As of April 2017—We Are Commodity Bears

To be clear—we are commodity bears today, and have been since the start of 2017. And so far, so good, with the Bloomberg Commodity Index (BCOM) down -4.5 percent year to date (as of May 15, 2017). Also, this call is a tactical (or cyclical) one, meaning over the next 6-18 months.

The bottom panel of Chart 1 shows the connection between the U.S. dollar and commodity prices. Readings below zero indicate that there is a negative connection between the U.S. dollar and commodity prices. This means that when the U.S. dollar has gone down in the past, commodity prices have typically gone up. To be even more precise regarding Chart 1, which stretches over the past 50 years, the U.S. dollar and commodity prices have moved in opposite directions from one another roughly 73 percent of the time (readings below zero).

Chart 1. U.S. Dollar versus CommoditiesChart 1. U.S. Dollar versus CommoditiesSources: Bloomberg, Wells Fargo Investment Institute. Monthly Data: 1/31/1967- 4/30/2017. Top panel is shown in a log scale. Dates selected to show all available data from source. Commodity Index represented by the CCI Index. Past performance is no guarantee of future results.

Gold Is Where We Could Be Really Wrong

Historically speaking, gold is one of the most sensitive commodities to U.S.-dollar movements. The bottom panel of Chart 2 highlights the connection between the U.S. dollar and gold. Notice the differences between the bottom panels of Charts 1 and 2. Gold has historically been much more sensitive to U.S. dollar movements than the average commodity. Over the past 50 years, the U.S. dollar and gold have moved opposite one another 95 percent of the time (readings below zero). Our year-end 2017 target for gold is between $1,150 and $1,250 per ounce. Should the U.S. dollar become excessively weak, gold could very likely trade higher than $1,250 (we doubt it will move beyond $1,400, though).

Chart 2. U.S. Dollar versus GoldChart 2. U.S. Dollar versus GoldSources: Bloomberg, Wells Fargo Investment Institute. Monthly Data: 1/31/1969 – 4/30/2017. Top panel is shown in a log scale. Dates selected to show all available data from source. Past performance is no guarantee of future results.

Gold May Be the “Place to Be”—Should the U.S. Dollar Get Hit Hard

Chart 3 is a snapshot of the U.S. dollar, since 1979. The shaded areas represent the 21 declines of 10 percent or more in the U.S. dollar. The statistics for each decline are shown in Table 1. Notice that the average commodity typically rises (including many of the major commodities), during significant U.S. dollar declines. Gold, especially, has been a great trade, during past big U.S. dollar declines (in 20 of 21 cases, gold prices gained).

Lastly, Chart 3 shows that the U.S. dollar has not experienced a 10 percent or greater decline since 2011. A quick glance at the shaded areas in Chart 3 makes it clear that this is the longest stretch since 1979. To be clear—this is not evidence that a decline is imminent, and we are not expecting such an event. In fact, Wells Fargo Investment Institute is neutral-to-positive on the U.S. dollar over the next 12 months. With that said, we in the real assets group are paid to worry about what potentially could make us wrong about our bearish commodity call in 2017. The U.S. dollar could make us wrong—should it become unexpectedly, excessively weak.

Chart 3. U.S. DollarChart 3. U.S. DollarSources: Bloomberg, Wells Fargo Investment Institute. Monthly Data: 1/31/1979 – 4/30/2017. Data shown in a log scale. Dates selected to show all data related to Table 1. Past performance is no guarantee of future results.
Table 1: Select Commodity Performance During U.S. Dollar DropsTable 1: Select Commodity Performance During U.S. Dollar DropsSources: Bloomberg, Ned Davis Research Group, Wells Fargo Investment Institute. Commodity return represented by the CCI Index, Gold by spot price, Oil by WTI spot price, Copper by perpetual futures price. Data as of 5/12/17. Past performance is no guarantee of future results.

Risk Factors

There is no assurance that any of the target prices or other forward-looking statements mentioned will be attained.

Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.

Investments in gold and gold-related investments tend to be more volatile than investments in traditional equity or debt securities. Such investments increase their vulnerability to international economic, monetary and political developments.


Bloomberg Commodity Index is a broadly diversified index comprised of 22 exchange-traded futures on physical commodities and represents 20 commodities weighted to account for economic significance and market liquidity.

The Thompson Reuters Continuous Commodity Index (CCI Index) comprises 17 commodity futures that are continuously rebalanced: Cocoa, Coffee Copper, Corn, Cotton, Crude Oil, Gold, Heating Oil, Live Cattle, Lean Hogs, Natural Gas, Orange juice, Platinum, Silver, Soybeans, Sugar No. 11, and Wheat.

U.S. Dollar Index (USDX) measures the value of the U.S. dollar relative to majority of its most significant trading partners. This index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies.

An index is unmanaged and not available for direct investment.

Global Investment Strategy (“GIS”) is a division of Wells Fargo Investment Institute, Inc. (“WFII”). WFII is a registered investment adviser and wholly-owned subsidiary of Wells Fargo & Company.

The information in this report was prepared by the GIS division of WFII. Opinions represent GIS’ opinion as of the date of this report and are for general informational purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon.

Additional information is available upon request. Past performance is not a guide to future performance. The material contained herein has been prepared from sources and data we believe to be reliable but we make no guarantee as to its accuracy or completeness. This material is published solely for informational purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or investment product. Opinions and estimates are as of a certain date and subject to change without notice.

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