Investors Seeing Red (and Yellow) — Evening Brief – 05.22.24
Commodities have been on a solid uptrend since mid-June of last year, when WTI crude oil began to rise from the low $40s. Following a period of stability in February and March, many commodities, particularly energy and metals, have witnessed significant gains.
The WisdomTree Enhanced Commodity Strategy Fund (GCC), for example, is up 15.4% this year, more than four percentage points higher than the 11% year-to-date advance in U.S. equities, as measured by the SPDR S&P 500 ETF (SPY).
Several bullish factors have pushed key commodity prices higher. For example, copper, a major component in renewable energy, reached an all-time high this week.
From a technical perspective, the red metal is profiting from the aftermath of a massive short squeeze on the Comex, which feeds into long-standing speculation about global deficits due to the energy transition. Still, some physical signs remain weak, so keep an eye on whether copper’s prompt spread, which has been locked in a bearish contango, narrows more.
Fundamentally, a rise in the prices of raw materials used in manufacturing and transportation indicates that investors expect a protracted expansion and a possible return of inflation.
Gold has also reached a fresh all-time high on fears about government debt and inflation. The yellow metal is up more than 18% year-to-date and is poised to challenge $2,500 per ounce.
Agricultural commodities are also witnessing impressive gains. Bloomberg recently reported that “Global grain supplies will be tighter in the coming season, setting the stage for higher prices for agricultural commodities as economies are still coping with stubborn inflation…”
Rate Cuts to Fuel Rally
In a recent research report, Goldman Sachs emphasized the potential for commodities to rally further when interest rates fall. The investment bank maintains an upbeat outlook on commodities, forecasting favorable total returns of 15% by year-end, with some sectors anticipated to achieve returns of more than 20%.
One of the bank’s most important findings is the historical correlation between commodities and interest rates. Goldman analysts point out that materials have historically rallied when interest rates have been decreased in a non-recessionary environment, a trend that could bode well for the sector.
Goldman highlighted that a 100-basis point decline in interest rates would benefit copper and gold the most.
The prospects of a rate cut by the Federal Reserve later this year are still alive thanks to encouraging inflation data last week. Fed funds futures now reflect a better than 50-50 chance that the central bank will cut interest rates at the September FOMC meeting.