Predicting the commodities market for 2018 is a dangerous game with indexes failing to agree on potential gains, thus indicating volatility across investments. But the unease inherent in the market during 2017 could be coming to an end.
Oil and precious metals were rising at the beginning of the year and yet remained reasonably priced when compared with previous years. Indeed, some analysts believe that prices are at a cyclical low, suggesting that US stock prices compared to an index of commodities make the latter as cheap as they have ever been.
Caution is advised, however, given soaring stock markets at the beginning of the year that have now perhaps peaked and indeed stabilised. Nevertheless, you would have to go back to the dying days of Bretton Woods exchange arrangements to witness the same opportunities in commodities. This does not involve gold alone but other commodity favourites such as metals, agriculture and other mainstays of the sector.
This suggests that base and precious metals along with commodities related to the energy sector will likely see an increase in value this year. These will look a safer bet than agriculture which, due to weather fluctuations during 2017, is proving harder to predict.
Whether global warming or freak climatic conditions, meteorological considerations have had a huge influence last year on market prices across the globe.
Political tensions are notorious for influencing the commodity markets as investors fly to safe havens at the first hint of global tension. With a relatively new inhabitant at the White House threatening to tear up existing agreements with countries in South East Asia and the Middle East, gold prices may be the first to rise. As the US Federal Reserve seems to have an appetite for hiking interest rates, enthusiasm for the dollar may wane. Should it adopt a looser agenda, gold could recover losses and still looks relatively cheap.
Meanwhile, oil prices continue to be affected by OPEC and Russian cutbacks in production which are likely to continue in 2018. As demand is predicted to increase close to the 1.8m barrels per day hike seen in 2017, during the coming year, prices are likely to go only one way, possibly hitting a 10-15 percent rally.
Some global oil producers may attempt to buck the trend in manipulating prices by adjusting supply. Analysts will keep an eye on Saudi Arabia, the major player in global markets. A public offering of divisions of Saudi Aramco this year may influence potential pricing levels of shares.
China may influence the base metal market including aluminium and zinc as they are major purchasers. The Chinese government’s reduction of aluminium smelting on environmental grounds could push prices up. Add the fact that the country is the largest user of zinc and the indicators are a tightening of the market.
Copper prices, however, may have peaked and the demand for 2018 appears uninspiring as Chinese demand appears to be weak. Nevertheless, it remains a versatile commodity with many uses and so although it has shown dips over the past few years it may yet be something to keep an eye on as prices remain low relative to the years prior to the financial crisis of 2008.
As for agricultural products, the weather issues mentioned above, combined with price predictions, could suggest lower acreage plantation across both the northern and southern hemispheres. This would suggest speculation in grain may be one of the features of the coming months. Dry conditions in South America contrasted with wet predictions for Australia show the influence of weather conditions and their effect on futures.
Sugar and coffee are also subject to the weather conditions and global inventories are relatively low, suggesting there will be opportunities in these markets with supplies tightening.
Timber also deserves a mention at this point as the construction industry picks up across the world.
Metals and agriculture could be the big opportunity for 2018 as other investments seen as safe bets in the bond market and equities fail to keep pace with the commodities sector.
There is little doubt that demand for commodities is increasing globally. Economies which have been depressed for a decade are accelerating in a cycle of synchronised growth.
Simon Lynch is the owner of Treasury Talent.
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