The commodity supercycle that began back in the 1970s may be at an end as the GSCI Excess Return Index recently reached 42-year lows. At these depressed levels, there has been no shortage of speculators trying to call the bottom. Bloomberg reported that ETF investors spent about $24 billion over the past 18 months failing to call a bottom in crude oil alone – the most ever spent in a single ETF category trying to predict a rebound.
Rather than trying to predict a rebound, investors may want to make themselves aware of the upcoming factors that could influence prices and base their trades on those events instead.
Energy: Economics vs. Politics
The difficulties in predicting a crude oil rebound stem from both supply and demand factors. With China’s slowdown and widespread economic malaise throughout the developed world, commodity demand seems unlikely to rebound anytime soon. OPEC’s decision to maintain supply in order to starve out U.S. shale producers suggests that the supply side of the equation isn’t in a position to support higher prices for the time being either.
While the underlying economics are bearish, crude oil could see a significant rebound from rising geopolitical risks in the Middle East. Tensions between Saudi Arabia and Iran over the execution of a Shia cleric could turn a distant proxy war in Yemen into a more widespread conflict in the region. Since Saudi Arabia is the world’s largest supplier of crude oil by far, any conflicts in its territory could cause significant volatility in crude oil markets.
Precious Metals: Safe Haven Assets
Gold prices have been relatively muted over the past several years. With record low interest rates in the developed world, investors have poured money into equities and other assets that have experienced significant gains. Gold prices are trading down 12.4% over the past year and 22.5% over the past five years, while the S&P 500 is down just 2% over the past year and is trading up a robust 54% over the past five years.
These dynamics could begin to shift as rising interest rates and global tensions depress equity valuations. If these risks continue to persist, gold prices could see a rebound in 2016 as investors seek out a safe haven asset class. The yellow commodity has also seen a spike in demand from jewelers and retailers buying for entirely different reasons. Silver prices have been relatively muted by comparison on both fronts.
Industrial Metals: Supply Could Surprise
Copper prices plummeted nearly 20% throughout 2015 amid slower demand from China and other emerging-market economies. With China’s industrial production falling sharply, short selling industrial metals like copper and nickel has become a popular trade. Many commodity producers, like Freeport-McMoRan Inc. (FCX), saw their share prices plummet more than 70% as it shut down its Sierrita mine and took 45,000 tons of annual capacity out of the market.
On the plus side, the reduction in supply could potentially cause prices to spike if demand rebounds unexpectedly. World mine production increased about 3% in the first eight months of 2015, according to the International Copper Study Group. This was lower than many were expecting. Supply cuts by Freeport and Glencore and start-up delays among new mines could continue to constrict supply in 2016 and create a floor for prices.
The Bottom Line
The commodity supercycle that began in the 1970s may have been erased, but commodity bulls could still see a recovery in 2016 if certain events transpire. Energy prices could rebound if geopolitical tensions increase, precious metals could rebound from the same, and industrial metals could experience a supply shock if China’s economy shows signs of improvement. These are all scenarios worth watching closely in 2016.
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