You can count on commodities to perform well in times of political or economic uncertainty. Gold, in particular, offers investors a safe haven when the going gets tough – at least that has always been the accepted wisdom.
Base and precious metals, basic foodstuffs, oil and gas; all have traditionally been regarded as reliable stores of value when economic hard times hit, or war clouds loom on the horizon.
Given the double shocks of Brexit and Donald Trump’s election last year and more recent uncertainty over Spain’s future sparked by Catalonia’s push for independence, you’d expect 2017 to be proving a bumper year for commodity trading prices.
Yet while most have moved higher, for many classes the picture has been more one of recovery rather than boom after two relatively weak years.
The Bloomberg Commodity Index
The Bloomberg Commodity Index, which tracks a total of 22 products, has been fairly flat since the start of 2017; due in part to the fact that sizeable stockpiles of many basic commodities have been accumulated.
A forecast for 2018, issued by the World Bank in late October, predicts that the market will remain subdued over the year ahead.
It pencils in a 4% increase in energy prices, but only a 1.2% rise for agricultural commodities and a -0.7% decrease for metals and minerals.
Stronger economic growth figures for many of the world’s major economies over the past 12 months is proving more of a driver than geopolitical uncertainty, says Michael Cohen, head of energy markets research at Barclays (below).
“There have been no more than four, maybe five periods in the past 40 years when economic growth has been uniformly positive worldwide and we’re now in one such period,” he notes.
A recent report by Goldman Sachs confirmed that demand for commodity trading has been robust due to the improved economic backdrop. “All markets are currently facing the best demand backdrop in over a decade with strong global synchronous growth,” the bank advised.
Bitcoin: forex or commodity
The one commodity to have regularly hit new heights in the past 12 months didn’t even exist a decade ago. This is the global cryptocurrency bitcoin, which has attracted growing interest and investor demand since its launch at the start of 2009.
While many might still contend that it doesn’t qualify, a growing number of analysts concede that the sharp price fluctuations it has attracted mean that bitcoin – along with other virtual currencies – is more a commodity than a currency.
Among the more traditional commodities, the better performers over the past year include the following:
After five years of declines, coal prices rebounded last year and the recovery has continued in 2017. Paradoxically, this has been helped by China, both the world’s largest consumer and largest producer of coal.
The country is attempting to clean up its act and reduce the volume of harmful emissions from coal-burning power plants, so production levels have fallen.
Prices have rallied from the sharp decline that occurred from mid-2014 onwards, helped not only by stronger growth in many economies but also geopolitical concerns over Saudi Arabia and output limits imposed by both Opec and non-Opec producers.
“Rising prices reflect the fact that Opec is finally achieving some success in restricting output, after three years of trying – and at times shooting itself in the foot, such as in late 2016 when it upped its exports,” says Michael Cohen.
However, the World Bank’s projected modest rise for 2018 would only lift the average price for crude oil from $53 a barrel this year to $56.
Prices have steadily climbed since early 2016, thanks to strong demand from chemical and fertiliser producers, which has steadily reduced stocks. Recently, natural gas futures have traded at near $3.20 per MMBtu (million British thermal unit).
Prices have been helped by strong demand from China, a major consumer of industrial metals, and
Underlying demand for gas has risen over the past five years due to exports of liquefied natural gas (LNG) and a growing number of gas-fired power plants as coal is steadily phased out.
Base metals supply challenges
Unlike the energy sector, where new sources such as shale are being developed, supply is less able to stay ahead of demand.