The commodities market experienced a solid start to the year with the vast majority of asset classes experiencing strong gains. While the rebound in crude oil has dominated the headlines, precious metals like gold and silver rallied in the double digits. These dynamics caught many investors off guard and waiting on the sidelines to see if the rally is sustainable, particularly in high-yield bonds and other troubled energy assets.
Below, CommodityHQ.com takes a look at some of the top-performing commodities, their underlying exchange-traded funds (ETFs), and where they may be headed.
Oil’s Surprise Rebound
Brent crude oil prices rebounded more than 17% so far this year, according to Finviz, driven by a global economic rebound and stabilizing supply and demand.
The Energy Information Administration (EIA) expects crude oil prices to reach $40.52 per barrel in 2016, which is up from its April estimates of just $34.73 per barrel. Analysts attributed the significant increase to improving economic data, growing supply interruptions, and falling U.S. crude oil production and rig counts. The EIA also increased its 2017 forecast from $40.58 per barrel to $50.65 per barrel to reflect the bullish outlook.
Despite the bullish performance, many crude oil ETFs remain in the red for the year. The United States Oil Fund (USO) – the largest ETF in the space – remains 2.9% lower so far this year, which is due largely to its tracking of WTI crude oil prices (versus Brent) and its use of futures contracts rather than buying the underlying commodity. The Energy Select Sector SPDR (XLE) has performed significantly better with an 8.5% return holding energy equities.
Precious Metal Strength
Silver prices were among the best performers with a 24% gain so far this year, while gold prices were close behind with a return of around 20% for the year, according to Finviz.
The Silver Institute reported a 3.4% increase in demand last year driven by a 24% increase in investment in coins and bars. At the same time, a 13.2% drop in recycled silver supply offset a 2.1% increase in mine supply and led to an overall decrease in yearly production. These dynamics led to a deficit of 4,040 tons, which is about 65% higher than a year ago and the third year in a row that global silver was in a supply shortfall.
The iShares Silver Trust ETF (SLV) was among the best-performing commodity ETFs in the market so far this year with a 23.4% rise. The PowerShares DB Gold Fund (DGL) and iShares Gold Trust ETF (IAU) came in a close second and third with a roughly 19.5% return. Many investors have turned to precious metals as a safe-haven asset class while interest rates have remained unexpectedly low throughout the developed world.
Natural gas was the worst-performing commodity so far this year, falling more than 16% amid chronic oversupply, although these issues may be working themselves out. Agricultural commodities were mixed with wheat falling nearly 5%, corn rebounding nearly 4%, and soybeans posting more than 24% gains. Coffee prices have remained about even at a 1.5% drop on the year, while sugar prices have risen just over 4% in 2016.
The Bottom Line
Commodities have had a strong start to the year driven largely by gains in precious metals and crude oil. Investors looking to capitalize on these gains should keep in mind that equity and futures-based ETFs don’t always following the underlying commodities in terms of direction and magnitude, which means that they should do their homework before buying.