There hasn’t been a clear asset class winner so far this year. Equities fell in January and February, while commodities looked as if they were ready to stage a comeback. But since then, stocks have recovered from that early misstep and commodities appear to be trading in the doldrums once again.
Complicating matters is the Fed’s confusing statements regarding its interest rate policy and inflation expectations. As it stands, investors aren’t pricing in a rate hike this year until December at the very earliest – which is likely to be pushed into 2017. The lack of inflation and the drop in the dominance of the U.S. dollar means that certain commodities could benefit over the next quarter.
Commodities Set to Shine
There hasn’t been a more confusing commodity trade than oil this year. Prices remain stubbornly low as OPEC continues its attack on other oil producers like U.S. shale, while the market has been holding its breath for news of a potential production freeze that would help boost prices.
Still, oil has been slowly creeping higher over the past several weeks. The World Bank raised its estimate for oil this year from $37 per barrel to $41 per barrel and expects oil to continue to rise as the year goes on but warns that further production from OPEC could create short-term drops. If oil can hit $50, that should help kick-start energy companies who have been aggressively cutting costs into spending on new drilling and production endeavors.
While most assets have been giving investors whiplash this year, gold and silver have been steady outperformers. Gold is up nearly 18% year to date, while silver is up even more at 25%. The waning strength of the U.S. dollar sent investors pouring into gold as the safe-haven asset of choice. And while gold should keep seeing healthy gains throughout the second quarter, the real growth story is what’s happening in silver.
Silver values tend to lag behind gold, but gains or losses are usually amplified. What’s helping silver is growing industrial demand for the precious metal. Unlike gold, silver has more practical uses in many industries. The reduction in metal mining over the past couple of years has created a supply shortage that has boosted silver values as a result. Furthermore, an expected drop in the U.S. dollar, along with the Fed’s policy direction, should make a strong bullish case for the precious metal moving forward.
Improving news from China has also helped boost other commodities like aluminum. The industrial metal recently hit a nine-month high. Steel has seen impressive gains as well. Copper, the commodity known for its role as a global economic health gauge, has been sending mixed signals to investors. Earlier this year it looked as if copper was in a full-blown bullish recovery, but since that quick start, copper’s been sluggish at best.
The Bottom Line
While many commodities look like they’re finally starting to recover from a bottom, agricultural commodities aren’t faring as well. Bumper crops has created oversupply issues and weaker-than-expected growth in emerging markets means lower prices for agricultural commodities. Low energy costs are also keeping prices down.
Investors should keep a close watch on newly developing commodities like aluminum as a reflection of global economic direction. Further, a production freeze for oil could mean a huge boost for commodities across the board, while gold and silver should keep outperforming regardless of what happens in the energy industry.