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Commodity Update

Commodity Update: Is the Summer Slump Over?

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Summer Slump: Commodities Return -5.7% in Q3

Commodity Update for Q3 2016

Last update, we triumphantly proclaimed that commodities were “back”.

However, we did forget to add one important caveat, which is that they could still get hit hard in the short-term by the classic “Sell in May and Go Away” market sentiment.

In Q3, commodities as a whole entered a “summer slump”, returning -5.7% as measured by the GSCI (Goldman Sachs Commodity Index). Performance was dragged down mostly by agricultural goods such as wheat, corn, and soybeans, but also by uranium which had another poor quarter.

Despite this bump in the road, most commodities are still having big years on a YTD basis:

  • Silver, crude oil, and zinc are all up over 30% on the year.
  • Gold, palladium, natural gas, and nickel are all up over 20%
  • Uranium is the only metal in red, down over -30%

Here’s Q3 and YTD performance for each commodity:

 Q3YTD
Silver-3.2%39.0%
Brent Oil-1.2%34.2%
Zinc-3.2%31.4%
WTI-2.1%30.1%
Palladium19.1%28.4%
Gold-1.3%24.3%
Natural gas-2.7%23.8%
Nickel11.9%23.5%
Platinum-2.8%15.9%
Aluminum1.4%12.8%
Soybeans-18.0%10.4%
Copper-0.5%3.6%
Corn-6.5%-5.9%
Coal1.3%-7.7%
Wheat-6.3%-14.4%
Uranium-12.0%-31.6%

There’s no doubt that Q4 will be another interesting quarter for the sector.

In November, the U.S. election will take place, and pundits are warning that a certain result would cause extreme market volatility. At the same time, some experts think that this unpredictability could fuel a mega-rally in gold and other precious metals. We think both of these things are possibilities.

Meanwhile, the recent tentative OPEC deal has brought crude oil to four-month highs. However, markets are skeptical that the deal is for real, and the general sentiment seems to be that a production freeze may fail to materialize as all parties try to finalize the deal.

What are your predictions for commodities over the next three months?

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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.

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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:

Commodities with Positive Returns in 2017 H1

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.

Commodities with Positive Returns in 2017 H1

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.

S&P 500 vs. GSCI

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.

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Base Metals

Chart: How Every Commodity Performed in 2016

See the winning and losing commodities for 2016 in this chart.

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2016 Commodity Performance

It was an up and down year for commodities, but things ultimately finished in the black.

The S&P Goldman Sachs Commodity Index (GSCI) climbed 10.1% on the year – it was just enough to edge out the S&P 500, which ended 2016 with a 9.5% return.

Winners in 2016

The biggest winners on the year were base metals and the oil and gas sector.

Here’s how base metals did:

Base MetalQ1Q2Q3Q42016
Iron Ore37.0%-6.2%6.3%31.1%81.0%
Zinc20.0%13.1%-3.2%26.1%65.7%
Nickel-3.1%13.9%11.9%-5.0%17.3%
Aluminum3.8%7.2%1.4%4.0%17.3%
Copper0.1%3.9%-0.5%13.1%17.1%

Iron ore and zinc were the best performing commodities on the face of the planet in 2016. Iron finished up 81%, its first calendar gain in four years. Meanwhile, zinc shot up 65.7% on the year as major zinc mines shut down, and supply stockpiles dwindled.

Oil and gas also posted a major comeback in 2016:

EnergyQ1Q2Q3Q42016
Natural gas-17.0%53.3%-2.7%28.0%58.5%
Oil (Brent)0.6%35.1%-1.2%13.6%52.4%
Oil (WTI)-3.2%37.3%-2.1%11.4%44.9%

It was a volatile year overall, but it appears that the worst of the downturn in energy prices is over.

Losers in 2016

Not all energy-related commodities could be so lucky.

Uranium continued its epic nosedive, losing -41.6% on the year. U3O8 now trades for $20.25/lb, a tiny fraction of its previous highs of over $100/lb in 2007.

Energy LosersQ1Q2Q3Q42016
Uranium-16.0%-7.4%-12.0%-14.7%-41.6%
Coal0.5%-9.3%1.3%0.0%-7.7%

Coal has also performed abysmally, at least in North America where CAPP prices finished down on the year -7.7%. We previously showed the decline of coal in three charts, and it seems that coal will likely continue to be an unpopular choice for utility companies in the U.S. and Canada.

That said, it is worth mentioning that Australian coal prices went bonkers earlier this year due to a Chinese administrative oversight.

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