Gold, commodities and riding the supercycle
Sustained rising commodity prices are known collectively as a ‘supercycle’, and many market observers believe we have been going through one in the past year, due to a complex mix of supportive market and economic factors stemming from the pandemic.
Commodity values have knock-on impacts throughout global economies, affecting companies’ costs, supply chains and revenue projections. So what are the forces driving this shift in value?
Dissecting the supercycle
This year has seen copper, iron ore and timber reach record highs, despite pressure on a renewable energy transition. This upturn is partly due to increased consumer spending on home improvements and physical goods, as well as the launch of numerous government-backed, multi-billion-pound and resource-intensive infrastructure developments.
The mining industry has joined energy as one of the biggest dividend payers in the natural resources sector, and agricultural traders have taken advantage of higher prices and unusually strong demand from China.
Miners, oil drillers, trading houses, steelmakers and farmers have been making significant profits and, in many cases, rewarding investors after more fallow years with share buybacks and higher dividend payments.
Commodities and indices
As major global indices like the FTSE 100 and S&P 500 contain many oil and mining stocks, there is a degree of correlation between the major indices and commodity values.
Some traders may accordingly back their view on commodities by trading specific indices. For instance, a trader backing oil prices to increase might buy derivatives that track the big indices, energy sector ETFs, or the individual oil stocks within those indices.
Gold: an historic hedge
Gold has almost sat in an asset class all of its own for many years, with a unique set of properties and a particular role in portfolios.
The metal has traditionally been seen to rise in line with increases in the cost of living, so many investors have used it to hedge against inflation.
Globally inflation has been high for many months now, partly down to the monetary policies put in place through the pandemic, and yet the price of gold has largely remained in check through 2021. This may be due to expected attempts to cool inflation through reduced stimulus spending and interest rate hikes.
Gold’s other defensive potential comes from not being correlated to stocks or bonds. It has a history of steadily maintaining value whatever the surrounding economic conditions affecting other asset values.
It should be noted, though, that the mining industry, including companies that extract gold, is often subject to high volatility. When assessing stocks in gold-related industries, it is worth reviewing the company’s performance over time with regard to dividends to judge the long-term prospects.
Green energy tailwinds
The other macro factor driving commodity markets is the green energy transition, supported by governments and private investors seeking to support and take advantage of the drive for positive action against climate change.
The range of metrics, disclosures and targets that green energy firms must adhere to will impact their business models going forward. It’s up to established companies to adapt and evolve, while new or diversifying companies have an opportunity to lead the way into sustainable energy and business practice.
How to trade commodities
With Intertrader, there are a few different ways to add commodities to your portfolio. Traders can buy or sell companies directly involved in commodity extraction or production, or further down the supply chain, or trade contracts in the commodities themselves.
With a spread betting or CFD trading account, traders can go long or short of spot or futures contracts in gold, silver, Brent or WTI crude oil, or futures contracts in other commodities such as copper, coffee, cocoa, cotton or sugar.
As you are trading on margin, you don’t have to put down the full contract value to open a position, but you are exposed to the full effect of rising or falling commodity prices.
Published: 3 November 2021
You should under no circumstances consider the information and comments provided as an offer or solicitation to invest. This is not investment advice. The information provided is believed to be accurate at the date the information is produced.