over 2 years ago • 3 mins
After a strong start to the year, commodity prices finally seem to have hit a wall. But there’s good reason to think the market’s about to get a second wind…
✍️ Connecting The Dots
For the past nine months or so, commodity prices have been pushed up and up by the global recovery and the subsequent rise in demand for raw materials. Throw in record high inflation, and the stage was set for the prices of oil, copper, aluminum, and even grain to shoot up.
But more recently, those same macroeconomic trends have worked against commodity prices. Growing worries over the Delta variant are threatening to throw economic growth expectations off track, while the spike in inflation seems to have been temporary after all – just like the US Federal Reserve promised.
Thing is, the detrimental effects that macroeconomic factors like these have on commodity prices are often short-lived. Commodities investing is arguably more about the long term, which is much more influenced by microeconomic factors like supply and demand. And when you look at, say, oil’s supply and demand dynamics, you start to see something interesting: Asian demand has pulled back, sure, but global oil production is still well below pre-pandemic levels. So if the Delta variant doesn’t cause another hiccup in the economic recovery like some are predicting, oil demand should gradually pick back up even as supply remains low. And that would be positive for the slippery elixir’s price.
It’s the same with metals. Take copper: there’s been close to zero investment in new projects for the last decade, leaving the market close to peak supply. And considering that it takes at least two years to extend an existing mine and up to eight years to ramp up a new one, that tightening supply is likely to drive a record shortfall of copper over the next decade.
1. Investing in commodities is a marathon, not a sprint.
Commodity cycles happen over years, not months. And just like when you invest in stocks, your best shot is to speculate on the long term. To do that, you have to focus on the fundamentals: namely, supply and demand dynamics that should ultimately send prices up over time. That means hiccups like the one we’ve seen recently might not be a reason to panic: they might be an opportunity to buy the dip.
2. There’s a long-term opportunity in gold too.
Gold’s also taken a tumble, and most analysts aren’t expecting its price to bounce back particularly quickly. Still, a mixed short-term outlook for gold prices doesn’t mean you should ignore the metal altogether. Gold’s still worth adding to your portfolio for its diversification benefits, since its price doesn’t tend to move in lockstep with bonds, stocks, or cryptocurrencies. And if you’re worried that high inflation will stick around, gold’s value tends to keep up with price rises, rather than lose value like cash.
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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.