Nicole WillingRecent turmoil in the commodity market has attracted the attention of investors looking to make some potentially large gains from the volatility. Precious metals such as gold have traditionally been considered safe havens in times of heightened volatility, with their prices rising to multi-year highs in recent weeks.
But the risk of racking up large losses could give investors reason for pause. Demand for industrial commodities such as crude oil and base metals have been hit hard by government-ordered lockdowns to slow the spread of the Covid-19 pandemic. US oil prices turned negative in April for the first time in history. And contractions in national GDP figures during the first quarter indicate the start of a recession.
More than ever, investors asking: “Is now a good time to invest in commodities?” should do their research before putting their money on the line. So, which are the best commodities to trade this May?
Commodity market overview: unprecedented volatility drives markets
The commodity market is seeing an unprecedented shift in value. Gold climbed to its highest level since late 2012 in April and is again approaching resistance above $1,700 per ounce.
Central banks around the world have cut interest rates and boosted spending to support their economies, driving investors towards gold as an intrinsic store of monetary value while currencies become devalued. Gold ETFs have been reporting record net inflows in recent months in the flight to safety.
The palladium price soared to a record high in February, but has since dropped back sharply, missing out on safe-haven support from the gold rally, as Covid-19 lockdowns have reduced demand for palladium-based automotive catalysts. Platinum and silver have also come under pressure from the disruption to industrial consumption.
The demand destruction caused by the lockdowns coinciding with oversupply and the Saudi-Russia price war resulted in a 70 per cent drop in crude oil prices last month. They subsequently rebounded as investors engaged in bargain-hunting with some countries beginning to ease their restrictions on social and economic activity.
With so much uncertainty hampering financial markets, what are good commodities to invest in during May? Read on for five suggestions of commodities investments that could make near-term gains.
Top selections for investing in commodities during May
Gold
The ongoing turbulence in the global economy makes gold a clear choice for commodities investors. The push and pull of the twin forces of inflation and deflation – with economic contraction on one side and unprecedented financial stimulus on the other – have created a level of uncertainty in which the gold market thrives.
The precious metal has gained around 14 per cent year to date and analysts anticipate there is potential for it to reach – and break through – its previous resistance at $1,900 per ounce.
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There is a risk of the price retracing as coronavirus lockdowns end, if concerns begin to recede about the economy. But with economic stimulus set to continue in the near term, gold is likely to continue to outperform other commodities.
Coffee
Prices for Robusta and Arabica coffee fell in April, but the market has started to rebound on increasing concerns about the potential for supply disruptions from Latin America in the coming weeks.
A rapid rise in Covid-19 infections and increasing restrictions on the movement of people in Brazil, one of the world’s largest producers, is likely to cause a shortage of workers to harvest the country’s premium-grade Arabica crop, with the season set to begin later this month. The Robusta crop has largely been harvested already, so the focus for investors is on the Arabica price. A delay to the rainy season in Colombia is affecting harvesting there and labour shortages are affecting the harvest in Peru and Honduras.
A weak Brazilian currency has limited the upside for coffee prices recently, but the reduction in supply, coupled with a lack of inventory after a small crop harvest last year, could lift the price on the US market.
Silver
The price trend for silver has lagged the gains on the gold market, pushing the gold/silver ratio to record highs over 100. While silver would typically be expected to rise during times of economic uncertainty on safe-haven demand, the disruption to industrial consumption during the Covid-19 pandemic has outweighed the effect of investment interest.
But with silver so undervalued relative to gold, reversion to the mean could accelerate a rise in the market. Silver has climbed by 40 per cent from the March lows, and some analysts predict further gains could outpace the gold market.
Orange juice
Demand for most commodities has fallen during the Covid-19 pandemic, but with so many consumers in developed countries having meals at home, sales of orange juice have spiked to a six-year high. The market made its largest monthly gain since 2015 in March, rising to its highest level in a year.
The price has moved up by around 20 per cent since the start of 2020 and it could still rise further as supply remains disrupted by labour and transport shortages as well as reduced US output. The market has continued to rise as lockdown restrictions have been eased in various countries.
Crude oil
After the dramatic drop in prices some investors may be reluctant to risk trading oil, but there is potential to sell into any short-term strength in the market. The major oil-producing countries have started to cut output and demand has begun to rise with some countries returning to work, lifting the benchmark front-month Brent crude oil contract by around 50 per cent from the lows.
A reported drop in US stockpiles last week buoyed prices, and Saudi Arabia, the world’s second-largest producer, said it would cut output further to reduce the oversupply in the market.
Investors will need to monitor the market closely, using stop-losses to protect their positions. There is a risk that the front-month oil price will return to the negative territory when it reaches expiry. But futures contracts for later in the year when prices are expected to be higher could provide an investment opportunity.
What is the short-term commodity market outlook?
Most commodities markets are expected to remain under downward pressure in the near term from a lack of demand and rising inventories while countries ease their Covid-19 lockdowns to gradually resume economic activity.
Technical signals on the base metal markets continue to indicate downside momentum, but precious metals offer upside potential thanks to investment demand for safe-haven gold and, to a lesser extent, silver.
Soft agricultural commodities have been hit by a lack of demand from the restaurant industry, but logistical concerns are set to lift coffee prices and elevated household demand is supporting higher prices for orange juice. And crude oil is set to remain volatile on a fluctuating demand and supply balance.
All in all, investors need to be alert to the heightened volatility on the commodities markets given the global economic uncertainty.
Once you have decided on the best commodities to invest in during May 2020, you can start trading them through contracts for difference (CFDs) on Capital.com.
You can learn more about commodities CFDs trading with our free online courses and comprehensive guides.
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