Commodities

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Commodities

Commodity Market Returns               Q4           LTM

Bloomberg Commodity Index              - 9.4%      - 11.3%

Bloomberg Agriculture Index                 0.2%      - 10.8%

Bloomberg Brent Crude (N.Sea)          - 34.6%    - 14.9%

Bloomberg West Texas Int. oil (US)     - 37.5%    - 20.5%

Bloomberg Gold Index                            7.2%      - 2.8%

S&P GSCI Industrial Metals Index         - 7.0%     - 18.0%

Summary

  • Oil price plunges on supply boost
  • Metals continue to weaken amidst trade tensions
  • Gold performs weel as a "safe haven" asset

Oil price plunges on supply boost. As the price of oil squeezed higher throughout the first 9 months of the 2018, the Organisation of the Petroleum Exporting Countries (OPEC) responded rationally - by increasing their supply of oil, in order to prevent the price getting too high. Unintentionally, the execution of this coincided with an increase in supply by the US shale producers (non-OPEC). This supply-boost coincided with global growth fears, crashing the oil price in a short space of time. A lower oil price, whilst bad news for energy producing companies and lenders to the oil industry, it is good news for consumers of oil and often serves to stimulate the global economy.

Metals continue to weaken amidst trade tensions. The most important buyer of industrial metals has, for well over a decade now, been China. Their huge-scale infrastructure spending projects has given them an insatiable demand for construction materials. This also makes them the marginal buyer, meaning they push the prices of the raw materials around as the amount they buy changes over time. Hence, we would expect weakness during this period, given that the sustainability of China’s growth rate is being questioned, because of the trade war and the threat to future growth that it poses.

Gold performs well as a “safe-haven” asset. In periods of market stress investors seek so-called “safe haven” assets to protect themselves from capital losses. Gold bullion has historically been seen as a safe haven and this period was no exception, as we saw global equity markets come under pressure. Gold isn’t a traditional investment as it doesn’t pay you a return on your investment like equities and bonds. However, its scarcity value makes it the ultimate “real-asset” that cannot be devalued or debased. Compare this with “normal” currencies like the pound, that loses its purchasing power to inflation and can be debased when more money is printed. 

“It’s not your salary that makes you rich, it’s your spending habits.” –Charles Jaffe