The commodity market had a rough start to 2016, with the majority of commodities heading lower. While crude oil has dominated the headlines, there are a few commodity bright spots, including precious metals, grains, and meats, that have posted gains on the year. These commodities could come under pressure later in the year, however, with the U.S. dollar moving higher and the demand picture remaining quite sluggish.
In this article, CommodityHQ.com takes a look at some of the best and worst commodity performers and where they may be headed in 2016.
The best-performing commodities were precious metals, such as gold and silver, and grains, such as corn, soybeans, and wheat.
The rise of precious metals shouldn’t come as a surprise given the turbulent financial markets, which reignited interest in the safe-haven asset class. Over the past year, gold prices have risen 4.58% and silver prices have jumped 3.27%, as of January 25. Platinum and palladium were notable exceptions and fell to new lows that haven’t been seen since 2008, despite increasing demand from automakers and a limited supply from producers.
According to some analysts, the rise in gold and silver prices is attributable to a shift in funds from equities to perceived safe-haven investment classes, rather than a new sustainable bull market. The Federal Reserve’s decision to raise interest rates over time is expected to draw money away from zero-yield precious metals and into higher-yielding financial assets. For example, 30-year Treasury bonds have already risen by 4.11% so far this year.
Corn, wheat, and other commodities have also realized small gains so far this year, but these gains may be limited by the rising dollar. Since these commodities trade in dollars, they become more expensive for foreign buyers paying in weaker currencies, and as such, demand may fall. Producers may simultaneously increase their output for exports as they receive more local currency per unit they sell in dollars, which could push up the supply side of the market.
The worst-performing commodities were energy assets, including crude oil and natural gas, as well as some food commodities like orange juice and cocoa.
Crude oil prices fell by more than 20% as of January 25, reaching below $30 per barrel for the first time in more than a decade. With Iranian sanctions lifted, the market could see an additional 300,000 barrels per day shoved into the market, while Saudi Arabia and OPEC have maintained their dedication to squeezing out higher-cost producers from the market. The downside could be limited, though, since many OPEC members are struggling to meet budgets.
Orange juice prices fell by 14.21% and cocoa prices fell nearly 12% over the same time frame. In the U.S., orange juice demand is expected to be the lowest in 30 years as consumers switch to a wider array of other beverages. Although, traders see current prices as being oversold. Cocoa prices are falling after a strong 2015 performance, with many traders blaming profit-taking algorithms for the precipitous decline in the market.
The Bottom Line
Commodities experienced a rough start to the year and traders betting on a turnaround may want to wait on the sidelines. With the strengthening dollar and sluggish global economy, many commodities have struggled with a lack of customer demand. Some precious metals have posted modest gains and the supply side may be tightening, but the weakness doesn’t appear to be abating anytime soon based on the most recent data.