Commodities Slump Amidst Economic Uncertainty: Is This a Buying Opportunity?
The summer of 2023 has been a rough ride for commodities traders, with many of the largest commodity ETFs in the U.S. experiencing significant losses. This downturn, which includes indexes like Invesco’s Optimum Yield Diversified Commodity Strategy ETF (PDBC) and single-commodity funds like the United States Oil Fund (USO), has sparked concerns about a potential economic slowdown. While some experts see this as a cautionary sign, others believe the slump could be temporary and present an opportunity for long-term investors seeking diversification.
Key Takeaways:
- Commodities are down significantly in 2023, particularly oil and agricultural commodities.
- Gold stands out as an exception, trading near record highs and often seen as a safe-haven asset.
- The weakening U.S. dollar, as measured by the DXY index, could indicate weak global demand.
- The slump might be partly due to low trading volumes and large commodity trading advisors betting against the sector.
- Agricultural commodities are struggling, but the decline isn’t solely attributed to slowing demand.
- Corn prices have been affected by the lingering impact of Russia’s invasion of Ukraine in 2022.
- Central banks pivoting toward looser monetary policy could boost commodity prices, as seen in the past.
- Industrial metals, particularly those essential for the energy transition, are seen as potential long-term investments.
A Deeper Dive into the Commodities Slump
A Complex Picture of Supply and Demand
Despite the downturn, some experts note that oil supply is currently tight. The slump might be more about market mechanics, like low trading volumes and short positions taken by large traders, rather than a fundamental shift in demand. While agricultural commodities are also struggling, the drop isn’t necessarily driven by a lack of demand. The price of corn, for example, has been impacted by the ongoing disruption caused by the conflict in Ukraine, which has been felt for over two years.
Agricultural Commodities: Shaking off the Shockwaves
Sal Gilbertie, CEO of ag-focused investment firm Teucrium, believes that corn prices are finally stabilizing after the significant spike in 2022 due to the war in Ukraine. He emphasizes that prices are now back at the cost of production, a key level for agricultural products. While the Teucrium Corn ETF has dropped below its pre-invasion level, the cost of production serves as a floor, suggesting potential upside for corn and related agricultural commodities in the future.
Central Banks and the Commodity Outlook
The global shift towards looser monetary policy could provide a boost for commodities. Historically, commodity indexes have rallied following periods of rate cuts, particularly during the mid-1990s. Easier interest rates could stimulate consumer and business demand, leading to higher prices for commodities like oil and copper. Investors might find this trend encouraging.
Long-Term Opportunities in Industrial Metals
Despite the current slump, many experts believe that industrial metals related to the energy transition could be attractive long-term investments. These include metals like copper, zinc, and aluminum, essential for renewable energy projects and the electric grid.
Kathy Kriskey, senior commodities ETF strategist at Invesco, highlights the Invesco DB Base Metals Fund (DBB) as a way to capitalize on this theme. This fund holds futures on copper, zinc, and aluminum in roughly equal proportions. However, it’s important to note that the fund issues a K-1 tax form due to its partnership structure, which can add complexity for investors.
A Cautious Outlook and Potential for Volatility
Despite the potential for a rebound, the path forward for commodities is far from certain. Goldman Sachs economists predict a 20% chance of the U.S. economy entering a recession within the next year, which could further dampen demand. Meanwhile, oil supply is expected to increase in the coming months, potentially putting downward pressure on prices.
Navigating Uncertainty: A Long-Term Perspective
Investors seeking exposure to commodities might need to be patient and adopt a long-term mindset. The current slump, while concerning, could present opportunities for those looking to build a diversified portfolio. Industrial metals, particularly those related to the energy transition, appear to have significant growth potential, but it’s crucial to understand the risks and complexities involved in these investments.
The commodities market remains highly volatile, and investors should conduct thorough research and consult with financial advisors before making any investment decisions.
