The prices of the most followed commodities (mining and energy) are bullish. Silver and gold prices have been strong since the beginning of 2016, while oil prices have been on an upward trend since the middle of February. Investing in commodities is about speculating on the future. As a result, commodity investors are focused on where the markers are going to be three to five months from now.
Some Commodities Up Due to Weak Economic Outlook
Unlike stocks, which represent a publicly traded company, commodities are raw, unprocessed materials. All commodities fall into one of four sectors: energy (crude oil, heating oil, natural gas, coal), metals (gold, silver, copper, platinum), livestock and meat (lean hogs, pork bellies, live cattle, feeder cattle), and agriculture (corn, wheat, milk, rice, cocoa, coffee, cotton, sugar).
When you buy a stock, you invest in the company at a set price hoping it goes up in value in the future. With commodities, you speculate on what the asset will be worth at a specific time in the future. That’s why commodities are also referred to as “future’s trading.” And that’s why those who invest in commodities need to pay close attention to where the markets are going to be in at least the next three to six months.
Expectations for the just-completed first quarter are not good. In the first quarter, the expected earnings decline for the S&P 500 is -9.3%. At the start of the first quarter, the growth rate was projected at 0.7%. If the S&P 500 reports a decline in earnings in the first quarter, it will mark the first time the index has seen four consecutive quarters of year-over-year declines in earnings since Q4 2008 through Q3 2009.1
And the future isn’t looking bright, either. For the second quarter, the earnings decline estimate is -2/7%. Most analysts don’t expect earnings growth to return until the second half of 2016. But they also thought earnings growth would return in the second half of 2015.
The weak economic projections have helped lift some of the more closely followed commodities—namely silver, gold, and oil—higher.
Outlook for Most Watched Commodities
Aside from being used in jewelry, there is very little real-world need for gold. But as an investment tool, gold is king. Since the beginning of 2016, gold is up roughly 18%. The S&P 500, on the other hand, is up around three percent.
Gold remains bullish because it is used as a hedge against uncertainty. And there is a lot of uncertainty out there. The U.S. dollar is down almost five percent against a basket of 10 currencies because of its weak economic outlook. Precious metals like gold and silver have an inverse relationship with the U.S. dollar. When the dollar is strong, gold and silver usually fall. And when the U.S. dollar is weak, investors flock to precious metals.
Gold is also bullish because of weak economic conditions in China, Japan, Europe, Russia, and South America. There are also ongoing tensions in the Middle East fueling investors’ demand for gold.
Like gold, silver prices are also up since January 1, 2016. Trading at their highest level in almost a year, silver prices are up almost 24% year-to-date at US$17.00 an ounce. Silver prices are being driven higher by market volatility, economic uncertainty, geopolitical tensions, and a weakening U.S. dollar.
Despite concerns about an ongoing economic slowdown and a market saturated with oil, prices remain strong. Oil prices are up more than 50% since the middle of February near US$42.00 per barrel. Oil prices rebounded following somewhat encouraging news that the Organization of the Petroleum Exporting Countries (OPEC) and other major producers would freeze oil output.
But Saudi Arabia and Russia said they would only agree to a freeze in crude oil production if Iran and other major producers do, too. That seems unlikely—Iran wants to revive its oil industry after international sanctions were lifted.2
Oil prices remain solid right now, but that could change very quickly, especially in light of the fact that Saudi Arabia said it could nearly double production immediately to around 20 million barrels per day.3
At the same time, strong oil prices have helped lift the Canadian dollar close to the US$0.80 mark. Trading near US$0.79, the Canadian dollar is at its highest level since July 2015. Because oil accounts for a sizeable amount of Canadian exports, the loonie is highly correlated with the price of oil. The Canadian dollar is up right now, but if oil plunges to US$30 per barrel, you can expect the dollar to follow the same trajectory.
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- “FactSet Earnings Insight: S&P 500,” FactSet web site, April 15, 2016; https://www.factset.com/websitefiles/PDFs/earningsinsight/earningsinsight_4.15.16/at_download/file.
- “Saudi Arabia to join oil output freeze only if Iran joins,” Gulf Times web site, April 1, 2016; https://www.gulf-times.com/story/486839/Saudi-Arabia-to-join-oil-output-freeze-only-if-Ira.
- Mahdi, W. and Carey, G., “Saudi Prince Says He Could Add a Million Barrels Immediately,” Bloomberg web site, April 16, 2016; https://www.bloomberg.com/news/articles/2016-04-16/saudi-prince-says-he-could-add-a-million-barrels-immediately.