The topsy-turvy ride for commodities shows no signs of slowing down anytime soon. It started a few months ago, with talk of a post-Covid super-cycle when commodity indices rallied as government stimulus and low interest rates fuelled inflation expectations.
The S&P GSCI – a benchmark of 24 commodities in agriculture, energy and metals – has returned 40% year-to-date, a stark contrast to the 26% fall seen in 2020.
Unfortunately, the outlook for this asset class can change faster than most; and concerns about the Delta variant – alongside fears of China’s construction sector being in structural decline and the soaring energy prices in Europe – have really put the brakes on the potential for those super-cycle hopes.
Oil is an interesting area. It was only 18 months ago that the global lockdown and the price war between Saudi Arabia and Russia pushed the price of a barrel into negative territory. Since then, the price has continued to climb. The global benchmark Brent has neared $80 a barrel, its highest price since October 2018, as tight supply has fuelled a crude rally and demand in some parts of the world recovered faster than any analyst could have predicted.
The move prompted Goldman Sachs analysts to boost their year-end forecast for brent from $80 to $90 per barrel. However, the long-term outlook is not as straightforward. Backers would say that sufficient investment and development of oil and gas supplies is still crucial to market stability, even amid a global energy transition. Detractors point to the likes of fracking and technology changing the game for long-term demand of fossil fuels.
The Chinese economy is also key to the outlook for commodities. The recent troubles of Evergrande have been one factor weighing on industrial metals prices recently – although there is an argument to be had that China’s construction sector is in structural decline, significantly constricting the demand for metal. The likes of zinc and copper rely heavily on the Chinese construction sector as a source of demand. But again, the long-term story is more positive. Goldman Sachs predicts that by 2030, copper demand will grow nearly 600% to 5.4 million tons, while analysts also predict lithium and cobalt demand will rise by 40 and 20 times respectively by 2040.
Gold was the place to be for investors in 2020, but it has been a very different story this year. The yellow metal has been pretty weak for a while, despite inflation surprising to the upside and greater economic concerns. Central bank plans to start tapering their QE programmes may have hurt sentiment, while there is an argument gold had been overpriced on the back of the pandemic amid the rush for safety. Investors could make a case that this looks like a good entry point for gold as a long-term hedge against central bank failure. Silver has also made major gains, but it also has its long-term uses given it plays into the energy transition themes I talked about earlier.
Then there is agriculture, perhaps the greatest long-term story of all. I recently read the global population is estimated to be just shy of ten billion in 2050.
Feeding the world is going to be a major task that will require significant long-term investment.
The dispersion in returns in recent years means investors have to consider commodities as a series of sub asset-classes today. They also have to balance the short and medium-term impact of events such as the slowdown in the Chinese economy with the long-term story of energy transition and improving infrastructure – all of which feed into the commodities story.
We would never dissuade investors from an allocation to gold as a long-term hedge, particularly if inflation takes off, with the likes of Ninety One Global Gold or a multi-asset vehicle like VT Momentum Diversified Income fund, which has an allocation to gold, as viable options. With Latin America a hotbed for the mining of many industrial metals, investors may also want to consider the ASI Latin American Equity fund.
Darius McDermott is managing director of Chelsea Financial Services