Commodity Markets Update: Price Performance of Gold, Crude Oil and Other Metals in 2016
The primary driver for the price of a commodity is supply and demand as the market aims to assess the ‘net worth’ of any particular asset
The Australian materials sector has outperformed the broader share market so far this year, which is primarily due to rising commodity prices in 2016. While most commodities have fallen sharply during 2015, futures traders see upside in an industry currently at the bottom of the industry cycle.
Background: Low Commodity Prices a Result of Supply & Demand
The primary driver for the price of a commodity is supply and demand as the market aims to assess the ‘net worth’ of any particular asset. Excessive oversupply and low demand means that the price of a single unit will likely go down as units are produced in excess and ‘we have more’ than required. Retailers or consumers have many options to choose from, which puts pressure on prices. The same principle applies to goods in the retail space as high competition often equals lower prices.
However, if there is a shortage of supply and/or high demand, the price will likely rise.
The International Monetary Fund (IMF) has revised its global growth outlook downwards several times in the past 12 months, stating that most economic developments are “consistent with a subdued outlook for the world economy, but risks of much weaker global growth have also risen”. The IMF believes that the primary reasons for the lack of growth are a slowdown or rebalancing of China and declining capital flows to emerging and developing economies. Global growth is a significant driver of demand. However, commodity prices have tumbled in 2014/15 as growth remains relatively subdued and most countries produce more goods than the world economy needs. What does that mean for commodities in 2016 and how should investors position themselves to be on the “right side” of this trade?
May Update: Most Commodities Have Appreciated in 2016
During our last update in February 2016 we noted that lean hogs, gold, silver tin, and platinum were the strongest performers year-to-date while nickel, crude oil and gasoline started the year in the red. As at 18 February 2016, gold prices were 14% higher and crude oil prices 15% lower year-to-date.
The table below is a summary of prices and price movements of a number of commodities in the futures market year-to-date. Please note that list is neither conclusive, nor can we make a guarantee for the accuracy of this data.
Most commodities have appreciated so far this year (period 1 January 2016 to 13 May 2016, with the exception of copper, nickel and natural gas prices. Crude oil (“Brent”) has gained 29% year-to-date with the benchmark commodity rising from US$37 to US$48, while the type West Texas Intermediate (“WTI”) has gained 25%. Gold prices jumped nearly 20% year-to-date on the futures market as investors hope that gold offers ‘safety’ amid financial and economic turmoil. While many critics argue that investing in gold is little rewarding as the commodity does not pay dividends, gold has been the beneficiary of negative interest rates around the world. While most central banks are currently lowering interest rates to stimulate economies and encourage spending, policy makes in Japan and Europe have implemented negative interest rates, which has put gold back on the radar for many investor as it represents stability.
Commodity Price Summary in the Past 12 Months
As seen above, most commodity prices have risen year-to-date, but long-term data will likely provider a greater insight for investors. The table below is a summary of prices and price movements of a number of commodities in the futures market over the past 12 months. Also, please note that list is neither conclusive, nor can we make a guarantee for the accuracy of this data.
The table highlights the extend of last year’s commodity bear market, as most major commodity prices are still down more than 20% over the past 12 months. Tin and gold futures are the exception up 6% and 4% respectively.
Silver prices have been relatively flat during the past 12 months and platinum is down 9%. Nickel remains the worst performing commodity, down a staggering 39% since May 2015.
Despite the recent upsurge of base metals and other commodities, price weakness remains evident which puts pressure on the entire industry as well as economies as a whole. There is no guarantee that prices will continue to recover, however it appears that futures traders see value in a beaten-down sector, which has historically been cyclical in nature.
Author: Simon Herrmann
May 16, 2016
Simon is a financial analyst at independent research firm Wise-owl specialised in small-mid cap growth opportunities and ethical investment opportunities. Simon's aim is to disrupt the cliché approach to investment decision making as he believes that socially and environmentally responsible behaviour is a necessity to long-term wealth creation. Simon has a deep fundamental understanding of the global financial landscape and has compiled 300+ research reports, valuations and corporate appraisals. Simon is commonly featured in major media outlets and his research is published weekly in The Australian.