The overall commodity asset class moved lower in 2023. A composite of the leading 29 commodities that trade on the U.S. and U.K. futures markets fell over 4.5% for the year that ended last Friday.
Soft commodities led on the upside, with gains in cocoa and frozen concentrated orange juice futures. Energy commodities posted the most significant loss, with a substantial decline in natural gas futures prices.
The highest interest rates since 2007 weighed on commodities throughout most of 2023 as higher rates increase the cost of carrying inventories. Moreover, economic weakness in China, the world’s leading commodity consumer, caused the demand side of the asset class’s fundamental equation to decline.
As we head into 2024, the potential for a soft landing, with lower rates and a weaker U.S. dollar, could ignite another substantial rally as prices have declined from the inflation-fueled 2020-2022 highs.
Precious metals: Gold shines, platinum group metals tarnish
- Gold led the sector with a 13.45% gain in 2023.
- Silver was only 0.17% higher.
- Platinum fell 7.33% for the year ending on December 29.
- Palladium plunged, falling 38.3% after reaching a record high in 2022.
Base metals: Copper leads the other metals do not follow
- COMEX copper futures gained 2.10%, while LME copper forwards rose 2.23%.
- The least liquid LME metal, tin, rose 2.45%, while LME aluminum forwards edged 0.25% higher.
- LME nickel plunged 44.75%, leading the sector to the downside.
- LME zinc and lead prices fell 10.58% and 9.79%, respectively.
- Rising inventories, Chinese economic weakness, and high interest rates in 2023 weighed on industrial metals.
Energy: Oil leads a bearish sector
- WTI and Brent crude oil fell 10.73% and 10.18%, respectively.
- Gasoline and heating oil futures moved 15.01% and 23.25% lower for the year.
- Natural gas was the weak link, falling 43.82%.
- Refining spreads declined, with the gasoline crack losing 28.94% and the distillate processing spread falling 39.71%.
- Rotterdam coal fell 43.15%, and ethanol prices lost 28.11%.
- The weakest sector in one year tends to come back during the following year.
Grains and animal proteins: Mostly bearish action sans cattle
- Corn futures led the sector lower with a 30.55% decline.
- Soybeans fell 14.86%, soybean meal dropped 19.33%, and soybean oil was 25.03% lower.
- CBOT, KCBT, and MGE wheat futures declined 20.71%, 27.70%, and 22.96%.
- Rice futures edged 4.13% lower, while oats moved 5.04% higher.
- Cattle futures rose, with the feeders posting a 21.01% gain and the live cattle moving 6.71% higher.
- Lean hog futures declined 22.49%.
- The 2024 crop year and grilling season will begin the cycle for the commodities that feed and power the world again in spring.
Soft commodities: The leader often becomes a laggard
- Cocoa futures led the softs with a 61.38% gain. Frozen concentrated orange juice futures soared 46.41%.
- Coffee futures rose 12.55%, while world sugar futures edged 2.69% higher.
- Cotton fell 2.84% for the year ending on December 29.
- After a bullish 2023, the leading commodity sector could become the laggard in 2024. However, the weather and crop issues will determine the path of least resistance for volatile soft commodities prices in 2024.
The bottom line
- While the U.S. long bond futures fell 0.57% in 2023, they ended the year in a bullish trend after reversing from the October sixteen-year lows.
- The Fed’s pivot to a more accommodative monetary policy stance could push rates lower in 2024.
- The dollar index ended 2023 down 2.17% and is in a bearish trend. Falling interest rates, the 2024 U.S. election, and the potential for a BRICS currency could weigh on the U.S. currency in 2024.
- Falling rates and a weaker U.S. dollar are typically bullish for commodity prices.
- Happy New Year!
Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!