Selloff in the Leading Commodities

In May 2024, copper futures traded to a record $5.1985 per pound high. Gold reached an all-time $2,454.20 peak, and silver broke out on the upside, reaching its highest price since late 2012 at $32.50 per ounce. Cocoa futures reached a record high in April, and frozen concentrated orange juice futures did the same in May. While crude oil prices have been under pressure since mid-April, natural gas recovered, reaching nearly $3 per MMBtu on the continuous NYMEX futures contract.

Since those April and May highs, commodity prices have corrected, which could be a golden, no pun intended, buying opportunity. Even the most aggressive bull markets rarely move in straight lines, and commodities are no exception. Since the 2020 pandemic-inspired lows, the raw materials asset class has been like a relay race, with one of the six sectors handing the bullish baton to another. Precious metals, base metals, energy, grains, animal proteins, and soft commodities are the liquid sectors trading on the U.S. and U.K. futures markets. In 2023 and Q1 2024, soft commodities led the asset class on the upside.

For five compelling reasons, the prospects support higher commodity prices over the coming months and years.

Interest rates are going to decline

• S. inflation data has declined but remains above the Fed’s 2% target level.
• The May employment data was higher-than-expected.
• The European Central Bank cut short-term interest rates by 25 basis points in early June.
• Beginning in June, the Fed cut the level of quantitative tightening, further putting upward pressure on rates on the yield curve.
• The Fed faces contradicting data, making a continued pause likely. However, barring any economic surprises on the inflation front, the next monetary policy move will be a rate cut.

De-dollarization is very bullish for raw materials

• The bifurcation of the world’s nuclear powers, tariffs, and sanctions has significant economic ramifications.
• China and India are already purchasing crude oil from Saudi Arabia for yuan and rupees.
• Central banks, led by China and Russia, have been increasing their gold reserves.
• China and Russia are leading the move towards rolling out a BRICS currency, backed partially by gold, to challenge the U.S. dollar’s dominant reserve currency role.
• As the dollar’s reserve currency status declines, the U.S. currency’s purchasing power will likely diminish, supporting higher U.S. inflation and rising commodity prices.

China will emerge from economic malaise

• China and India are the world’s most populous countries, with over one-third of the global population.
• China is the second-leading economy behind the U.S., and its growth will likely make it the top economy in the coming years.
• China’s exponential growth over the past decades has experienced a lull over the past years.
• Chinese innovation and the centrally planned government will likely lift the country from its current economic weakness over the coming months and years.

The trends are your best friends

• Market prices are always correct, as they reflect where buyers and sellers are willing to transact in real time.
• The path of least resistance of prices in any market reflects collective wisdom.
• Even the most aggressive bull or bear market trends experience occasional corrections and recoveries.
• The long-term trend in commodities since the 2020 pandemic-inspired lows remains bullish.
• The trend is always your best friend over time.

Demographics support higher prices

• Commodity fundamentals reflect the supply-demand balance.
• A deficit occurs when the demand rises above available supplies, and a glut when the supplies exceed the current demand.
• The global population continues to rise is over eight billion. Before 1960, there were under three billion people inhabiting our planet.
• More people require more food, energy, and shelter each year.
• Commodity supplies must keep pace with the rising demand.

Some of the leading commodity prices have declined after the recent rallies, but the bull market that began in 2020 remains firmly intact. Buying on dips has been optimal for years, and that trend could continue as fundamentals and technical support a continuation of higher highs in many raw material markets.

Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!