Top Reasons For being Bullish on Commodities This Year – Introduction
In the past few years, commodities have lagged other asset classes. A rise in the global stocks market has not spurred the expected growth in the commodities market. In fact, part of the reason why the stocks markets have risen significantly is because of the drop in the commodities prices. The chart below shows the performance of the Bloomberg Commodities Index (BCOM) in the past five years.
Already, the year has started a bit positively for several commodities like lumber, crude oil, and cocoa. Here are some of the reasons why this could be the year for the commodities.
- The dollar
The dollar index reached a multi-year peak in 2016 when it reached a high of $102.91. Since then, the dollar has been coming down, recently falling to a three year low of $88.2. A weaker dollar is often viewed as a positive for the commodities market because most of them are usually quoted in dollar terms. A good example for this is in the crude oil market. As shown below, the crude oil has come down as the dollar has strengthened.
The same is true among other commodity prices which are mostly traded in dollar terms. A weaker dollar could lead to a rise in other commodities like gold which are usually used for hedging.
- The Economic Growth
All the major economic forecasts suggest that the global economic growth will continue to accelerate this year. The surge in economic growth, especially in the Asian countries will potentially lead to more demand for commodities. For example, when the middle class expands, so does the increase in demand for cars which in turn leads to higher demand for crude oil. Since production of crude oil is not increasing by a lot, this could lead to a balancing which will lead to higher prices.
This could apply to agricultural commodities like cocoa, coffee, and lumber.
A major reason why volatility in the financial markets has increased recently is because of inflation. Traders have become worried about the rise of inflation which could trigger more rate hikes this year. Already, inflation has started to go up in several countries like the US, Canada, and the UK. As the inflation rises, so will the prices of the underlying commodities.
- Accelerated Recovery
As I mentioned above, commodities have had bad years recently. This year, some commodities have started on a positive note, led by crude oil and some agricultural products. A bullish start of the year could lead to a start of a new bull run for the commodities. As the volatility increases in the financial markets, investors could also start making a push to the commodities market.
From a technical analysis stand point, the commodities index is currently at an RSI of above 57. This means that there could be some more upside for them.
- Change in Technology
Finally, new technologies are either coming up or increasing in popularity. For example, the electrical car market is not new but because of new better cars, more people are moving to adopt them. This has led to more demand for commodities like copper, lithium, and cobalt. As the world moves from fossil fuels, there could be more need for these commodities.