Assets generally follow a pattern over time. Equities, bonds and currencies all follow a similar path while some commodities are inversely correlated with them. It’s no surprise then that with stocks still relatively near their highs, commodities are tanking.
However, the U.S. dollar has been wavering and stocks haven’t been looking so hot lately. Gold has been on an upwards tear as expected, while oil remains stubbornly low thanks to OPEC’s battle against other oil producers like U.S. shale. But gold’s sudden revival isn’t necessarily due to the relationship between poorly performing stocks and rising commodity prices. Still, there are signs of a paradigm shift taking place.
What Gold Is Telling Investors About Other Commodities
Gold is off to its best yearly start since 1980 – up around 20% year to date. The economic slowdown in China and rock-bottom oil prices have helped gold outperform along with rising inflation that’s outpacing interest rates. Gold is also a leading economic indicator for commodities. After a fast start, gold usually underperforms relative to industrial metals as the economy begins to pick back up. And despite what most investors think, gold isn’t the only commodity on the move.
Copper has seen a recent boost in value as well. In the past month, copper prices have risen by nearly 10%, benefiting mining stocks like Southern Copper Corp. (SCCO). Copper miners have said that they plan on increasing copper production this year as opposed to last year. Glencore PLC, a European commodity trading company, notes that the global copper supply is dwindling.
A more promising sign is the activity in iron and steel values. Iron ore prices have skyrocketed 66% since December, boosted along by China’s higher-than-expected estimated economic growth rate of 6.5% to 7%. AK Steel’s (AKS) stock has nearly doubled since January and doesn’t show any signs of slowing down.
The cutbacks in production last year are benefiting the industry right now. Steel production fell 10.5% year over year in 2015, which reduced capacity going into 2016. At least for a while, steel should shine like gold.
The Bottom Line
Earlier this month, Glencore’s top executives said that commodity prices may finally be bottoming but that it could get worse before it gets better. Still, the rise in gold, copper and steel could be a precursor to a global economic recovery.
What’s interesting is that in gold’s case, no one seemed to anticipate its recovery. Even in January, when gold began to rise, investors doubted its strength. Anyone who suggested that gold could go up based the idea on the simple concept of low oil prices and the fact that gold had been low for an extended period of time and was therefore due for an increase.
Hindsight may be 20/20, but the miss in anticipating gold could be a clue as to what the global economy could do next. The evidence suggests that a real recovery could be shaping up, but the other possibility is that the cutback in the production of metals last year is only making it look like a recovery is happening when the boost is only temporary.
