Commodities remain a top-performing asset.
Over the past 12 months, the iShares S&P GSCI Commodity-Indexed Trust (GSG) rose by 24%. At the same time, the S&P 500 index lost about 20% of its value.
Individual investors have started trading commodities as they had never done before.
Retail trading volumes in commodity futures soared last year.
Two main drivers caused this.
First, inflation. It surged in most countries to decades-high levels. In response, central banks hiked interest rates aggressively. Their tightening policy tanked stocks and bonds.
But commodities proved to be an inflation hedge again in 2022.
Second, geopolitical risks, such as the war in Ukraine, changed the commodities market. Some markets, such as wheat, for example, were hit by a supply shock. (Ukraine is one of the world’s largest exporters of wheat.)
What should commodity investors expect in 2023?
Read on to find out.
Optimistic about Gold
Gold is one of the most popular recession plays. And this year, recessions are likely to happen on both sides of the Atlantic.
The International Monetary Fund has recently issued a warning. Its managing director Kristalina Georgieva said that one-third of the global economy would be hit by a recession in 2023.
If recessions hit multiple countries, their central banks will start stimulating the economy to stop the economic downturns.
This would be the “pivot” that investors anticipate.
If interest rates go down, the currencies of the countries that will lower their interest rates will become weaker. That weakness could be a major driver for gold.
The same rule applies to the US, of course. If the Fed pivots and starts stimulating the economy, the value of the US dollar will decline. And the price of gold, which tends to be inversely correlated to the value of the USD, might go up.
In our view, this scenario is more likely than the scenario in which the Fed continues hiking well into 2023 and potentially next year.
Multiple recessions across the world today could create a bullish setup for gold.
Lithium: EV Fundamentals Provide Support
Since 2020, the price of lithium has surged over 10-fold.
The growth of the EV market was the primary cause of that, of course.
Throughout 2022, lithium prices remained strong. They were supported by the idea that EV makers might not be able to secure enough lithium supply to meet the growing demand for electric vehicles.
The EV trend will remain a more important driver of the price of lithium this year than macro-level developments such as recessions.
Even mainstream analysts have realized that lithium isn’t a traditional industrial metal like steel.
This realization means that they will look at the lithium market from a different perspective. And the main thesis of lithium investing is that it is very likely, in our view, that the lithium market will remain in a state of deficit. This could continue supporting the metal’s price not only this year but also in the decades to come.
New supply could balance the market, but it will most likely come from lower-grade deposits. Lower grades mean high costs of ore processing. The projects that are coming online will need high lithium prices to stay profitable.
New projects may also face delays, which means that the supply of the metal might not increase as fast as some analysts hope for.
Overall, the lithium market remains a standout in the commodities space. And in 2023, it could stay strong based on the fundamentals of the EV trend.
Thank you for your loyal readership,
The Financial Star team