This year is shaping up to be a roller coaster ride for investors. After a sharp drop of more than 5% to open up the first quarter, stocks have since recovered and are now trading about flat. The interest rate hike that the Fed announced in December suddenly seemed very premature with concerns that deflation may be a very real threat as the year began only to be retracted a month later, damaging the Fed’s credibility with investors and injecting more volatility into the markets. But the perhaps the biggest news we’ve seen this quarter comes from a nearly forgotten part of the global economy.
Commodities are back in investors’ cross-hairs, and it’s not just gold and oil that have them talking. After the end of the commodity supercycle and the persistent strength of the U.S. dollar, hard and soft commodities bottomed with no sign of life for more than a year. For the first quarter of 2016 though, signs of life came roaring back with an intensity that took many investors by surprise.
Commodities Making Moves in the First Quarter
With the exception of oil, which has been stuck in a political quagmire, with OPEC fighting to maintain control of the market and wrestle away any grip from foreign producers like U.S. shale oil, many commodities have been seeing rising demand.
Gold is one of the biggest winners year to date with gains of around 15% but has come down over the past few weeks from gains of nearly 20%. Unlike most commodities, gold trades mostly for its relative value as a safe-haven asset or inflation hedge. It’s also inversely correlated with the U.S. dollar and equities. Back in January and February, the dollar seemed to show some faltering while stocks clearly underperformed, helping gold reach a new 52-week high. As stocks and the dollar recover from its earlier misstep, gold suffers.
But following in gold’s footsteps is silver, which has enjoyed gains of more than 10% year to date. Unlike gold though, silver could continue to rise. Silver is used both as an inflation hedge along with gold and as a widely used industrial metal with applications in a variety of industries. China’s announcement of higher-than-expected GDP growth of 6.5% to 7% this year has driven demand for silver along with several other commodities.
Copper and steel are two new entrants in the commodity winning circle this year. Copper is up around 10% so far and copper producers like Southern Copper Corp (SCCO) are increasing copper production to meet higher demands. For steel, the skyrocketing value of iron ore, up over 60% since December, is the primary catalyst. Limited production in the past few years has also contributed to an overall reduction in supply, helping to drive prices from both a supply and demand perspective.
The Bottom Line
While many commodities are seeing gains this year, others haven’t fared so well. Natural gas prices have plummeted more than 25% this year on milder than expected weather and a general malaise in energy-based commodities. Meanwhile, soft commodities are a bit of a mixed bag with varying degrees of success and failure. Sugar and coffee have done fairly well this year with positive gains, while others like wheat and cotton are down. Bumper crops are partly to blame for oversupply issues.
Going forward, commodities could be a good bet for investors. Those on the rise should continue to do so as the global economy recovers. Energy-based assets are likely in for a tough time but could show some improvement as the year goes on. A broad-based approach to commodities with ETFs or mutual funds will help investors take advantage of the rising tide in the commodities sector.
