The U.S. commodities market had a rough ride in 2017, with the benchmark Bloomberg Commodity Spot Index returing a total of 3 percent for the year, compared to the Standard & Poor’s 500 index, which soared 19 percent.
But 2018 could be a different story. As 2017 ended, both precious metals and oil prices were rising yet remained reasonably priced.
Global commodity prices are at a cyclical bottom, according to Adam Rozencwajg and Leigh Goehring, managing partners of Goehring & Rozencwajg Associates, a natural resource investing firm in New York. In written comments to U.S. News, they say: “As measured by the ratio of U.S. stock prices to an index of commodity prices going back 100 years, commodities are as cheap today as they have ever been.”
[See: 8 Gold ETFs to Buy Anytime.]
Only during the Great Depression and at the end of the dying Bretton Woods currency exchange standard that tied the dollar’s value to gold were commodities as undervalued relative to stocks, Rozencwajg and Goehring write.
Other commodity gurus agree, noting that nothing is ever etched in stone when it comes to metals, oil, agriculture and other sector mainstays.
“Base and precious metals, along with energy commodities, will likely move higher in 2018,” says Will Rhind, founder and chief executive officer at GraniteShares, an independent exchange-traded fund company in New York that offers two broad-based commodity funds. “While agricultural commodity prices may not be the worst performing sector in 2018, their dependence on local weather conditions make their forecast extremely difficult.”
Nevertheless, here’s what experts predict for specific commodities in 2018.
Gold. Ongoing tensions with North Korea, Iran and the Middle East are likely to push gold prices higher, Rhind says. “Prices should also rise due to a weakening U.S. dollar brought on by a proactive Federal Reserve that’s looking to stay ahead of the curve and is hiking interest rates to contain rising inflation,” he says. Provided the Federal Reserve backs off its stated tightening agenda, gold could regain its losses since September, increasing at least 10 percent. “Prices could go higher depending on geopolitical tensions and U.S. political difficulties,” Rhind says.
Relative to other pricier investments, gold represents a solid profit opportunity in 2018, precious metals experts say. “We are into one of the longest bull market runs in the history of the modern world, and the price of everything is looking expensive, whether it be stocks, bitcoin or real estate,” says Nolan Watson, CEO at Canada-based Sandstorm Gold. “One of the few things that isn’t expensive and is surprisingly cheap right now is gold.”
Oil. Already buoyed by OPEC and Russian production cutbacks as well as strong growing demand, oil prices are likely to enjoy more of the same in 2018. “Oil demand increased 1.8 million barrels per day in 2017 and is forecast to increase another 1.3 million barrels,” Rhind says. Plus, in its Nov. 30 meeting, “OPEC extended its cutback program through the end of 2018, helping keep supply in check.” If demand increases as forecasted in 2018 and OPEC and OPEC-aligned countries adhere to their cutback agreement, oil prices can rally 10 to 15 percent, reaching the low-to-mid $60’s in 2018, Rhind says.
[See: 7 of the Best Energy Stocks to Buy for 2018.]
Base metals. Copper, aluminum and zinc are up about 20 percent this year thanks to moderate-to-strong global economic growth, and prices for these base metals should continue rising as demand keeps growing in the U.S., Europe and especially China. “Government-mandated environmental curtailments of aluminum smelter activity in China, expected during the winter season, could tighten the market and push prices higher,” says Ben Ross, senior vice president and co-portfolio manager of commodities strategies at Cohen & Steers in New York.
Additionally, indicators in China, the largest zinc consumer, continue to point to a tight zinc market. “Despite high prices, we have not seen a meaningful production response indicating a lack of latent supply, which should be supportive of prices,” he adds.
Copper prices look lackluster, though. “We believe copper’s supply and demand outlook is uninspiring in 2018 due to a strong, expected bounce-back in mine supply and the potential for somewhat lower Chinese demand compared to 2017,” Ross says.
Agriculture. While a robust global inventory persisted for most grains in the 2017-2018 marketing year, corn and wheat prices have reached levels that should translate into lower planted acreage across the northern hemisphere in 2018, Ross says. “La Nina conditions, now confirmed by both U.S. and Australian weather agencies, also heighten the risk that dryness in southern Brazil and Argentina lowers corn yields, and wetness in Australia harms wheat quality in the coming months,” he says. “With speculative positioning very short, we like the risk-reward in grains, with particular preference for corn and high-protein Kansas City wheat.”
Cohen & Steers also maintains a favorable outlook toward sugar, with global inventories low and price support from favorable ethanol economics in Brazil. “We have a positive view on Arabica coffee, with tepid exports from key producers likely signaling tighter-than-expected supplies and weather issues developing in key producing regions,” Ross says.
The big picture. If ever there was a year for investors to take a chance on commodities, this is it.
“For those investors willing to ignore the noise and extreme negative commentary (regarding surging shale production, OPEC disunity, electric cars and China’s impending collapse), there is a proverbial fortune to be made if they invest today,” Rozencwajg and Goehring note. “When commodities are this cheap relative to stocks, the returns accruing to commodity investors have been spectacular.”
[See: 6 Ways to Invest in Agriculture.]
In fact, avoiding gold and other commodities could be a big mistake in 2018 — a year when “safe bets” may derail portfolio performance if it means passing up on the investment opportunities for commodities that abound.
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Commodities Have a Bullish Outlook for 2018 originally appeared on usnews.com
