It is important for investors to include commodities in their global asset portfolios as they enable diversification, hedge against inflation and help reduce volatility, according to an industry expert.
Hard commodities refer to energy and metal products such as aluminium, copper, gold, nickel, silver and platinum, while soft commodities are often agricultural goods such as wheat, cotton, cocoa, coffee, sugar and soybeans. Investors and traders can buy and sell commodities directly in the spot market or via derivatives such as futures and options.
With equities at elevated levels, now may be the time to add diversification to a portfolio through exposure to commodities as an alternative investment, suggests Ole Hansen, head of commodities strategy at Danish lender Saxo Bank.
“The global stock market is literally the Magnificent Seven, because the value of the major US stocks in terms of market cap is quite extreme and makes the equity market quite vulnerable to any major setback,” he says.
“The Bloomberg Commodity Index, which tracks 24 major futures markets, is down less than 2 per cent so far this quarter. This is a relatively strong performance, considering the market conditions and if we look at next year where trade wars will make things more complicated and inflation may potentially re-emerge, following months of decline.”
Commodities have served to deliver portfolio diversification and inflation protection over multiple decades. 2021 and 2022 saw two stellar years for commodities, fuelled by rising inflation, with the Bloomberg Commodity Index (BCOM) returning 27.1 per cent and 16.1 per cent, respectively. By contrast, 2023 saw the first negative performance for BCOM in three years, with a return of -7.9 per cent amid cooling inflation and slowing economic growth.
Economic conditions in China play a key role in driving commodity prices due to the country’s status as a top commodity importer. Geopolitical conflicts and global tensions also affect commodity prices as market participants tend to position themselves based on how they perceive these events will disrupt supply and demand factors.
The energy transition from fossil fuels to an electrified economy, adverse weather events, inflation, central bank policies and the direction of the US dollar also influence the direction of commodity prices.
“We have a potentially volatile year ahead of us, because of which we have a significant number of unknowns that hopefully will become known in the coming year,” Mr Hansen says. “We have a new president in the US. We have a Chinese economy that is struggling a bit. For a number of years, it has been the main driver of demand for key industrial metals.”
The first and foremost risk to commodities is a sharp deterioration in the global growth outlook. If tariffs are introduced at the upper end of what has been threatened, that will undoubtedly have an impact not only on Chinese demand and growth, but also growth elsewhere, he explains.
US president-elect Donald Trump has said he will impose an extra 10 per cent tariff on goods from China and a tariff of 25 per cent on all products from Mexico and Canada.
Mr Trump campaigned on pledges to introduce sweeping tariffs on allies and adversaries alike, vowing to increase tariffs to 60 per cent for all goods imported from China and to 20 per cent for those brought in from the rest of the world.
There is also the risk of a sharply higher dollar, which tends to negatively impact commodity prices because most of them are priced in dollars, Mr Hansen says.
“If there is a peaceful solution to the current geopolitical conflicts, it could create a peace dividend in the market, which could have a negative impact on gold in the short term, but it could also mean a better growth outlook, which would be supportive for commodities,” he explains.
“The biggest risk in the oil market is whether Opec+ can continue to stick together to control output. The oil market is a significant part of the global commodity system. But I ascribe only a small risk to this because Saudi Arabia will do the utmost to keep the group together and ensure the prices stay as high as possible.”
Gold is the most preferred commodity among UAE investors, followed by silver. Dubai is now the world's second-biggest centre for gold trading, a reflection of the interest and demand in the region for physically traded gold, Mr Hansen says. From a trading perspective, oil and copper are the most commonly used commodities in the region.
He recommends exchange-traded funds for retail investors to gain exposure to commodities and leveraged products for professional investors. However, it boils down to your risk appetite and knowledge about how these instruments operate, he warns.
Gold
The reasons why investors buy gold will not go away in the coming year. There is still some upside to be found in the gold price, according to Mr Hansen.
“I still think that $3,000 is achievable next year, from the current $2,600 level. The reason for that is we are living in a heavily indebted world, especially in the US. The policies that Mr Trump would like to initiate are going to raise the debt burden even more,” he says.
“That is raising some concerns among investors who would like to preserve their wealth over time. Some very high valuations in the stock markets may struggle to be maintained if we see funding costs and bond yields start to rise. Central banks will continue to buy gold and that will also underpin prices.”
Gold is one of the strongest performing commodities in 2024, setting successive records thanks to its appeal as a safe haven, its role as a diversification play to safeguard wealth, and central bank buying.
The ceasefire deal between Lebanon and Israel has reduced immediate geopolitical tensions in the Middle East, a key factor that had driven up gold prices. However, the Russia-Ukraine conflict remains a key driver of geopolitical risks.
The precious metal is up more than 28 per cent this year, despite falling this month after Mr Trump’s election victory sparked a rally in the dollar.
Bullion’s latest peak was at $2,790.07 last month, bolstered by the US Federal Reserve’s shift to rate cuts. Non-yielding gold tends to perform better in a lower-rate environment, Mr Hansen explains.
Silver
The less glamorous metal, silver, is one of the commodities that Saxo Bank is most positive about.
The white metal is valued both for its uses as a financial asset and an industrial input, including clean energy technologies. It is a key ingredient in solar panels, and with robust growth in that industry, usage of the metal is expected to reach a record this year, according to the Silver Institute.
Delegates at the London Bullion Market Association event in Miami said they expect gold to rise to $2,917.40 an ounce by late October next year, about 10 per cent above current levels. Silver will gain more than 40 per cent in the coming year to reach $45 an ounce, according to the survey.
“That is driven by scarcity of supply. Silver is used not only as jewellery, but also as in industrial application,” Mr Hansen says. “Demand for some of these industrial applications, including manufacture of solar panels, is expected to underpin demand.”
Gold and silver have both gained about 30 per cent this year, but silver has been more volatile, at one point trading up more than 45 per cent following an October rally that took prices to a 12-year high. Silver tends to get its directional inspiration from gold, industrial metals and the dollar, making it a somewhat more volatile metal to trade, says Mr Hansen.
Platinum
The positive outlook filters through to other metals such as platinum. It may outperform gold next year, given some of its usage, Mr Hansen says. The metal is used in autocatalysts that reduce emissions from vehicle engines, as well as in other industries and for jewellery and investment.
“Platinum is now trading around $960 an ounce, and the record was in 2008 when it peaked at $2,300,” he says. “For the last eight years, it's been hovering around $1,000, so it's been trading sideways for almost a decade.”
Apart from its use in catalytic converters, platinum has in recent years attracted increased demand for other industrial applications, which makes it less dependent on the car industry. Now, demand in the auto industry has been yielding some market share to palladium, Mr Hansen says.
Platinum is trading $1,700 cheaper than gold. So, that could potentially make it attractive over time, if the strength in gold continues, he adds.
Iron ore
Iron ore, which is used to make steel, may struggle because of the slowdown in the property sector in China, which is still coping with a massive supply overhang, Mr Hansen says.
Iron ore has benefited from the Chinese economic boom of the last 25 years. From the late 1990s to earlier this year, iron ore prices jumped nearly tenfold, more than any other major commodity.
head of commodities strategy, Saxo Bank
It is currently trading at around $102 a tonne, down 53 per cent from its all-time high of almost $220 in 2021.
Copper
Copper is required for the increased electrification of the world and hence the commodity’s outlook in the coming years remains quite positive, Mr Hansen estimates.
Its application ranges from electrical wiring to renewable energy infrastructure. It is integral to manufacturing electric vehicles, power grids and wind turbines.
“Demand will slowly become less dependent on China. It has been very dependent on China for a decade, with around half of the annual production being consumed there,” he says.
“The biggest roll-out in terms of electrification in the world is in China. Even while demand for gasoline and diesel shows a small decline, the demand for power is still very strong. Some of that lower demand for copper will likely go towards the renewable industry.”
London Metal Exchange copper hit a record $11,100 per tonne in May. Based on the current price, it would require an 18 per cent rally to go back to that record high, according to Mr Hansen.
Agricultural commodities
Agricultural commodities were hit by Mr Trump’s election win, with grain prices, particularly of soybeans, trading lower. This reflects fears that China could respond with retaliatory measures, potentially reducing US exports of key crops and creating downward pressure on prices, according to a Saxo Bank research note this month.
China, as one of the largest buyers of US soybeans, is a crucial market for American farmers, and any disruption to this trade flow could have significant implications for the agricultural sector, it said.
So far this year, there has been a divergence between the performance of soft commodities, such as cocoa, coffee, cotton and sugar, and grains, which include corn, wheat and soybeans, according to Mr Hansen.
“Price wise, this group is under pressure from big production, especially across the northern hemisphere. Cocoa and coffee, especially cocoa, are produced in relatively small areas. They are much more exposed to any adverse weather impacting production levels in these regions,” he says. “For cocoa, that’s West Africa, for coffee, that’s South America and Vietnam. These are places where troubled weather is lowering production.”
