2023 could be the third consecutive year of the commodity supercycle. After a 2022 in which a slowdown was seen, after a previous strong impulse, now it is necessary to see what configuration it has for the next year. Some even argue that it could be the fourth year if we reset the count to April 2020 instead of January 2021.
In any case, commodities have been on a roll of late. In 2022, when the total return of the S&P 500 dipped around 18%, the Bloomberg Commodity Index rose nearly 14%, reinforcing the credentials of commodities as a diversifier.
Now, commodities are a group, and even within a super cycle, performance is driven by different sectors at different times. Last year, energy led the way, while this year, energy could pass the baton to precious and industrial metals. “For this reason, we expect both strategic and tactical investors to closely monitor developments in commodity markets this year,” says Mobeen Tahir, director of macroeconomic analysis at manager WisdomTree.
The fashion of gold and industrial metals
Given the inflation numbers, what should have been an appropriate time for gold in 2022 turned into the perfect storm for gold due to the aggressiveness with which the Federal Reserve responded. “If the upward pressure on the dollar and Treasury rates eases in 2023, economic growth figures worsen and inflation remains high, gold could shine again,” Tahir says.
Also, a recovery in gold usually bodes well for silver. In fact, the gold-silver ratio reached an all-time high in March 2020. This was followed by 12 months in which silver far outperformed gold. This led the ratio to reach another high in September last year and since then silver has staged the promised recovery. Some investors would try to mirror their stance on gold through silver, especially if they see the encouraging industry in silver due to the energy transition.
Meanwhile, like growth stocks, industrial metals will temporarily lose their charm last year. “As we highlighted in our latest outlook on commodities, the recent disappointing performance in industrial metals has created a disconnect between physical market fundamentals and what is reflected in market prices,” says the WisdomTree expert. Physical inventories of most metals are well below their historical averages, while recent prices have been set by lockdowns in China and the prospect of a global recession.
The easing of lockdowns in China could catalyze a recovery in industrial metals. The purchasing managers’ index (PMI) for China’s manufacturing sector contracted between August and December last year. If the country’s economic engines start up again, buoyed by favorable monetary policy, industrial metals could benefit. On the other hand, the ever-present drive from the energy transition could further amplify this recovery if the macroeconomic context improves.
Investing in the energy transition
From Hurricane Ian in Cuba and the southeastern United States to drought in China and Europe to flooding in Pakistan, the devastating effects of climate change were on display last year. In addition, exorbitant energy prices have shown that we must act now to ensure energy security in an economically and environmentally viable way.
“In all our recent conversations with investors, the common denominator has been that the fight against climate change in the field of energy transition requires a global approach,” says Tahir. This means that technologies such as renewable energy, batteries, hydrogen, biofuels, recycling, carbon capture and many others have a crucial role to play.
“2022 closed even with some rumors about a breakthrough in nuclear fusion, however, many other technologies are already commercially available and effective. We hope that investors will continue to look for ways to optimize the reduction of their capital in the most promising innovations”, concludes the expert.
