In a complete turnaround from a terrible 2015, commodities in 2016 enjoyed their best yearly gain since 2010. The rebound was led by industrial metals – thank you Donald Trump – with iron ore and zinc among the biggest gainers.
The rally was broad-based and the actual top-performing commodity was natural gas, which had been a multiyear bear market.
Christopher Wyke, of Schroder Commodity Strategy, summed the year up perfectly for Marketwatch: “In 2016, commodities began the recovery from a five-year market.”
I totally agree. I believe price gains will extend into 2017.
The reason? Producers have wised up and have scaled back supplies, rebalancing the markets.
Here’s what you need to know about industrial metals, precious metals and energy for 2017.
Commodities in 2017: Industrial Metals
A major part of the “Trump trade” has been to buy industrial metals and the companies that mine them.
The winner for the year was zinc. Its move was partly due to rising demand in India and China as consumers buy better cars. The metal is crucial in fighting rust corrosion in vehicles.
Another big factor was a large supply cut by commodities giant Glencore PLC (OTC: GLNCY). It shuttered about 500,000 tons of annual production, producing an overall supply shortage in the market of roughly 400,000 tons.
The biggest laggard in the space, copper, has caught fire since Trump’s election. Inventories are falling just as demand from the United States and China seem to picking up.
And it seems all those supplies from mines that Wall Street was expecting to hit the market has failed to materialize. As one fund manager told the Financial Times, “We are just one bad labor negotiation away from a big price spike. The market really is that tight.”
I also expect nickel to enjoy a good 2017, while iron ore may cool off as more supplies come online.
Commodities in 2017: Precious Metals
Next, let’s consider the outlook for precious metals.
First, there are the metals that are really industrial metals – platinum and palladium. Both of which are used in catalytic converters for vehicles, with palladium used in gasoline engines.
Palladium enjoyed a 20% gain last year and it should have another good year in 2017.
Again, it gets down to supplies. Both palladium and platinum have seen multi-year supply deficits, with demand only being met by above-ground inventories.
But you can do that for only so long. Platinum inventories, for example, have dropped by half the past few years.
While there are supply worries a few years down the road for gold, the story there in 2017 is demand.
That’s because the gold market has now opened to 1.6 billion people that could not purchase it for investment or speculative purposes.
This is all thanks to the issuing of a standard on gold trading by the Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). This body generally sets the Sharia standards for all Islamic financial institutions.
Islamic finance is growing by leaps and bounds. By 2020, there will be between $5 trillion and $6.5 trillion in assets in Islamic financial institutions.
Even a very small allocation to gold by Muslims – which is likely – will add 500-1000 metric tons of physical gold demand onto the market.
That should boost gold prices and silver as well.
Silver usually follows gold higher, but does so with higher percentage moves. And it also had a fourth consecutive year of deficit, with the shortfall in 2016 coming in at about 52.2 million ounces.
Commodities in 2017: Energy
Finally, we come to energy.
The outlook for oil is murky, as usual. The agreement among OPEC and non-OPEC producers to lower output is definitely a positive.
But as usual, the key to the agreement will be compliance. Will the oil producing stick to the bargain or will they, as they have in the past, cheat and hope that other oil producers abide by the agreement?
Natural gas though is another story. As stated earlier, it was the top performing commodity in 2016 and is poised for another promising year in 2017.
Unlike during the doldrums of its long bear market, gas supplies are tight and getting tighter. That is a result of gas drilling rigs in the U.S. hitting their lowest level in August in more than a quarter-century.
U.S. gas inventories in underground storage declined by 687 billion cubic feet during the last six weeks of 2016. That is the largest seasonal decline since 2013.
Inventories were also 79 billion cubic feet below the 2011-2015 average. That was the first time in 2016 that inventories had fallen below the five-year average.
Add this supply picture to increasing demand for natural gas as utilities switch from coal to natural gas and you have the recipe for higher prices.
Overall, investing in many commodities in 2017 again looks to be a smart move.