Commodities Outlook 2H 2018
Commodities mostly failed to impress investors in the first half of the year. But continued growth in U.S. inflation, global debt, and geopolitical tensions could drive the price of raw materials higher for the rest of 2018.
Only three of the 14 major commodities tracked by U.S. Global Investors experienced a rise in prices over the first half, led by oil. Have a look:
Bolstered by an OPEC agreement to cut global supply, the price of crude has steadily been on the rise since 2016.
Oil prices were supported in the first half of this year by falling U.S. inventories, global unplanned supply outages, and political matters, which included Washington's sanctions against Iran.
But metals didn't fare so well. Aside from nickel, which has become an important material in the electric vehicle (EV) boom, precious and base metal prices slid lower.
President Donald Trump's metal import tariffs played a significant role in sending aluminum and zinc prices lower. And precious metal prices fell from a general lack of investment demand. Nevertheless, the remainder of 2018 looks bright for commodities across the board...
Commodities to Generally Rise During 2H 2018
U.S. unemployment is at an almost 20-year low. So, the Federal Reserve has been raising its short-term interest rates to keep the American economy from overheating.
The Fed reached its target of 2% inflation in the first half of this year, which was the highest level in six years. And many economists now believe that the banks could tolerate annual core personal consumption expenditures (PCE) inflation up to 2.5% before they increase rates more than already planned.
Inflation was below target for most of 2016 and 2017. So, it wouldn't be too surprising to see the Fed allowing higher inflation over the coming months. And that's important to commodity investors because prices usually rise when inflation accelerates.
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Meanwhile, global debt is soaring. A recent report by the Institute of International Finance (IIF) shows global debt climbing to an all-time high of $247 trillion! The report also shows the global debt-to-gross domestic product (GDP) ratio being higher than 300%. This was the first quarterly increase in two years.
These unprecedented debt levels make continued global growth vulnerable. The world has enjoyed significant economic expansion over the past several months. But sooner or later, the chickens will have to come home to roost. And it's not outside the realm of possibility to see some kind of general worldwide correction soon, in part due to rising debt levels.
The impacts of an economic downturn and the Fed's current monetary policy could be a recipe for sending commodity prices higher on their own. But pepper in destabilizing political alliances around the world and the case for commodities gets even stronger.
Right now, I'm particularly fond of gold.
The price of gold is hovering around a 52-week low of just over $1,210 an ounce. The yellow metal has seen a recent dip in investment demand while the dollar grew stronger in 1H 2018.
But gold has been the go-to hedge against inflation and monetary turmoil time and time again. And I expect to see a turnaround in demand for it for the rest of the year. This will lead to significantly higher prices.
Right now, I'm buying physical bullion and major producers. This includes Barrick Gold Corporation (ABX) and Newmont Mining Corporation (NEM). And you should be looking into gold and gold stocks now, as well.
As I recently mentioned in a letter to Energy and Capital, all the hype surrounding gold is dead. So, now is a great time to be a buyer.
Contributing Editor, Park Avenue Digest
As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bubble and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets.