Commodity markets rally as demand for raw materials climbs

Commodity markets have soared this year, but investors had to choose their bets carefully to profit. The S&P GSCI index of 24 major raw materials, a key benchmark, has climbed by 30% since the start of the year. Reopening economies and the green transition have driven a boom in demand for raw materials.

“Green metals”, those needed in the shift to renewable energy and electric vehicles, have done especially well since the start of the year, with copper climbing by 23%, nickel up by almost a fifth and aluminium soaring by 7%. The standout performer has been lithium, a vital ingredient used for making rechargeable batteries. The metal has gained 240% this year. Agricultural – “soft” – commodities have also surged, prompting fears about global food shortages. US wheat and corn prices have risen by 21% and 23% respectively. Cotton, up 37%, and coffee, 84%, have climbed by even more.

While investors grow excited about the battery revolution, more carbon-intensive energy sources have also rallied. Brent crude oil has gained 38% since the start of the year. Newcastle Coal futures, an Australian benchmark of thermal coal prices, have more than doubled.

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It has been a year of two halves for steelmaking-ingredient iron ore. Prices soared to a record high in May due to strong Chinese demand, then slumped in the summer as steel production fell and the local property market wobbled. Iron ore is 28% lower than on 1 January.

Precious metals disappoint

It has been a year to forget for precious metals. Platinum is down by 13%. Silver has fallen by 15% so far this year, putting it on track for its biggest annual loss since 2014, says Myra Saefong in Barron’s. You might have expected the wider industrial-metals rally to boost silver – the metal is used in industry as well as for jewellery. However, that is outweighed by silver’s status as an investment metal, says Decio Nascimento of Norbury Partners. Investors regard silver as a “high-beta version of gold”, meaning “when gold falls, silver falls even more”. Gold has slipped by 5% since the start of the year.

Gold’s failure to rally in response to the highest US inflation in 39 years is puzzling, says Clyde Russell on Reuters. It is supposed to protect investors from currency debasement, but perhaps gold is really a hedge against turmoil rather than inflation: the last two big gold rallies (2008-2011 and 2020) were caused by “fears of a global economic and financial crisis” rather than rising prices.

Gold looks set to struggle again in 2022, says Warren Patterson of ING. The metal pays no dividend, so some will be tempted to sell it to take advantage of rising interest rates. What might trigger a gold rally? “Further severe waves of Covid-19” that cause central banks to do “a U-turn on tightening”.