CIO Commodity Commentary

Gold-price setback after hawkish Fed

We expect commodity prices to continue to rise for the next 12 to 24 months. Commodity demand has recovered significantly since the depths of the Covid-19 crisis a year ago. As the global economy continues to recover, we expect demand to continue to increase. The prospect that inflation will rise is also providing support. In addition, investment in additional capacity across the commodity space has only been moderate, meaning, in our view, that supply growth will be limited. Given at least moderate economic growth – in the absence of material global demand destruction – we believe that supply-and-demand fundamentals will therefore benefit commodity prices over the long term, though geopolitical events remain a risk for the asset class.

As oil prices continue to climb, with the WTI U.S. crude-oil price recently rising above 70 U.S. dollars per barrel, the market continues to wait for any firm news as we head toward another round of talks in the next OPEC meeting at the beginning of July. Generally, market participants expect OPEC and Russia to remain consistent with their stated policy of gradually increasing production in line with the recovery in demand. However, the block will face a challenging decision as OPEC members and Russia have to chart a course for the remainder of the year. U.S. production growth was already slow prior to the recent investor proxies. With OPEC and Russia poised to increase market share going forward in response to any slowdown from the U.S. and European-based producers, our view is that any upside for the oil price in the near term will not be driven by supply but, most probably, by any particularly good news on the recovery in demand.

While the market fundamentals remain supportive for base metals, comments from the Chinese authorities about hoarding and speculation in commodity markets have been taken as a negative signal and have derailed the rally in base metals for the time being. We expect, however, that continued progress with economic reopening should support prices. Additionally, we expect that rising supply-side risks should prove supportive of prices across the space. Looking further ahead, as China ramps up its infrastructure plans, demand is expected to be strong through the first half of 2021 and we would expect to see continued investor interest in the complex. In the medium term the performances of different base metals may become more pronounced as the short-term macro drivers give way to supply-and-demand differences.

The slightly more hawkish comments by the U.S. Federal Reverse (Fed) in the June 16 FOMC meeting were a further setback for gold prices, taking them to their lowest level in the past six weeks, at around 1,780 U.S. dollars per ounce. As we had expected, the U.S. central bank said it anticipates two interest-rate increases by the end of 2023. Looking ahead twelve-months, we expect a level of 1,850 U.S. dollars per ounce for gold as inflation worries and continuing anxiety about Covid-19 variants support the precious metal.

With a lack of bullish catalysts in the near term, grain prices may continue to slide lower. But many factors could drive prices up again. China may limit imports of U.S. corn amid concern that overseas purchases have spiraled out of control, but this will only exacerbate their own shortages. As we head into the summer, given depleted inventories, we expect the market to be very sensitive to weather and therefore volatile. Lingering drought and a dry forecast may provide additional support for prices.

Past 30-day and year-to-date performance of major commodity classes

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Past performance is not indicative of future returns.
Sources: Bloomberg Finance L.P. and DWS Investment Management Americas Inc. as of 6/16/21.



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