Commodity Update
Commodities: Silver Skyrockets Post-Brexit, Energy is Back!
Commodities: Silver Skyrockets Post-Brexit, Energy is Back!
Commodities are back!
While commodity performance in Q1 was promising, it was mainly precious metals and zinc that buoyed everything else. Energy and base metals were relatively flat on the quarter, with uranium and natural gas having the biggest declines.
However, the game changed considerably in Q2. We now live in a post-Brexit world, where the real risk of further contagion in Europe is prompting investors to seek insurance policies. Silver is hovering near the $20 mark, which makes it the best performing commodity of the first half of 2016 with a 43.6% return.
But it’s not just precious metals that are back in vogue.
Energy had an impressive comeback in Q2, with natural gas and oil being the best performing commodities of the quarter. Base metals were up, and even the TSX Venture, a Canadian index tracking many of the world’s junior mining and energy stocks, was the best performing benchmark. This is meaningful, because it wasn’t long ago that the TSX Venture was in a mind-boggling 1,000+ day bear market.
Q2 Commodities by Subsector
Precious Metals
Gold, silver, and platinum all received a significant boost post-Brexit. In the week following the June 23 referendum, they were up 6.8%, 14.3%, and 9.7% respectively. Billionaire voices envisioning a potential bull market for precious metals include Stanley Druckenmiller, George Soros, and Ray Dalio.
Base Metals
Base metals, which did not receive a lot of fanfare in 2015, may have finally stopped the bleeding. Copper was virtually flat in Q1, while gaining 3.9% in Q2. Meanwhile, nickel and zinc both had double-digit quarters with 13.9% and 13.1% returns respectively. Zinc is up an impressive 35.7% YTD.
Energy
The energy sector came back with a vengeance. Brent and WTI had their best quarters in years with 35.1% and 37.3% increases. Natural gas was the top performing commodity in Q2, jumping up 53.3% to just short of $3/MMbtu because of unanticipated summer demand. On the other side of the energy spectrum, coal had another poor quarter, dropping -9.3% in price. (In a recent set of charts, we covered the decline in coal in depth.)
Food
The world’s agricultural commodities had a mixed bag for performance. Wheat was the worst performer, down -9.4% on the quarter. Corn was relatively flat, and soybeans jumped up 28.6%.
Chart presented by: Sierra Metals
Commodity Update
How Commodities Performed in H1 2017, and Why They’re Very Cheap
Here’s how all major commodities have done so far this year, as well as one chart that shows why they could still be very cheap for investors.
If you’re looking for action, the commodities sector has traditionally been a good place to find it.
With wild price swings, massive up-cycles, exciting resource discoveries, and extreme weather events all playing into things, there’s usually never a dull day in the sector. That being said, it’s hard to remember a more lackluster period for commodities than in the last couple of years.
For commodity bulls, the good news is that the sector is no longer tanking. The bad news, however, is that all the recent action has been in relatively niche sectors, as metals like cobalt, zinc, and lithium all have their day in the sun.
At the same time, the big commodities (gold, oil, copper) have all slid sideways, having yet to revisit their former periods of glory.
Commodity Winners So Far
Before we highlight why commodities could still be cheap, let’s look at recent performance to get some context. Here are the commodities that have positive returns in H1 2017 so far:
Palladium is the best performer in 2017 so far, and it has now almost passed platinum in price. That would be the first time since 2001 that this has happened, and for the stretch of 2007-2012 it was even true that palladium traded at a $1,000 deficit to platinum.
Agricultural goods like rough rice, lean hogs, oats, and and wheat have also gotten more expensive so far this year. Meanwhile, metals like gold, copper, and silver have seen modest gains – but these are only after dismal performances from the last part of 2016.
The Losers So Far
Here is the scoreboard for the commodities in negative territory, with the most noticeable losses in sugar and energy.
Are Commodities Cheap?
From the post-crisis bottom in 2009 until today, the S&P 500 is up a staggering 215.4%.
During that same timeframe, most major commodities crashed and then went sideways. The Goldman Sachs Commodity Index (GSCI) is down roughly -31.2%, which is a strong juxtaposition to how equities have done.
This extreme divergence can be best seen in this long-term chart, which compares the two indices since 1971.
In other words: despite the lack of action in commodities that we noted earlier, the sector has never been cheaper relative to equities even going back 45 years.
That means that there could be some much-needed action soon.
Base Metals
Chart: How Every Commodity Performed in 2016
See the winning and losing commodities for 2016 in this chart.
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