Commodities indicators may signal sustained uptrend

Current strong copper forecasts reflect positive outlooks for companies that mine and process other metals and minerals used in EV batteries, including aluminum, lithium, cobalt, manganese, nickel and iron — and for industrial materials in general.

Another bellwether for the entire commodities category is crude oil. Crude has shown distinct momentum recently, with 90% of S&P energy stocks above their 50-day moving average as of mid-August, with room to run. Crude hit the skids during the pandemic and then rose in early 2022, reaching pre-pandemic highs before declining below late-2019 levels the rest of the year, tamped down by — again — recession fears.

Then, in late 2022 through the first half of this year, crude climbed and, after some downward waffling, went on to build momentum and break its 200-day moving average earlier this summer by hitting $79 per barrel. In mid-August, benchmark West Texas Intermediate (WTI) completed seven straight weeks of gains, reaching $84.89. This kind of pattern has historically tended to presage sustained positive performance, a good sign for the remainder of 2023.

Sales from the now-depleted U.S. Strategic Petroleum Reserve appear to have ended, and the Russia-Ukraine war will continue to impede shipments from the Russian port of Novorossiysk (where about 2% of the world’s oil is shipped). Thus, the current scenario is one of crimped supply with sustained high demand.

While copper and oil are key indicators for the commodity markets overall, following them is of course no substitute for researching specific commodities.

Investors who don’t know a pork belly from a slab of bacon should be prepared for a steep learning curve — and potentially painful pitfalls. They should be aware that:

• Investing in commodities — whether hard (mined or extracted) or soft (grown or raised) — is much different from investing in conventional stocks. In buying shares of stock, per se, investors buy a piece of a company’s long-term future, whereas commodities immediately expose them to trading pressures from ever-flexing global supply-and-demand scenarios of metals, crops, energy, livestock, forest products and other areas. Prices can be whipsawed by intense momentary speculation on scant news. Yet, as with any investment, success requires looking beyond short-term fluctuations at factors that may indicate sustained trends.
• Many commodities funds have substantial exposure to futures — contracts to buy or sell a predetermined amount of a given commodity at a set time for a set price. Some individuals conflate futures with options, which give holders the right but not the obligation to buy or sell the underlying asset. By contrast, futures contracts are an obligation.
• Exchange-traded notes aren’t direct investments. Rather, ETNs are basically debt instruments backed by the issuer. So, investors must not only understand the dynamics of underlying commodity and the issuer’s track record, but also the issuers’ financial condition, including their ability to pay carrying costs — in the case of corn, rents on silos until sale. When storing corn for months, the owner is essentially speculating that the costs of doing so will be less than the increase in the market price of corn over the holding period.