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Fall 2024 Post-Election Webinar

Gauging the market impact of election results.

Key takeaways

  • Most commodity prices have been relatively flat since late last year.

  • Gold prices are a major exception, rising significantly throughout 2024.

  • Global economic growth trends often play a significant role influencing commodities markets.

Retreating prices for some commodities are contributing to lower inflation today.

“In early 2024, food and energy prices rebounded, temporarily raising inflation risks,” says Rob Haworth, senior investment strategy director for U.S. Bank Wealth Management. “But in recent months, prices leveled off, contributing to a modest downturn in the overall inflation rate.” Food prices, as measured by the Consumer Price Index (CPI), rose 0.5% in the past three months, a slight upturn. Energy costs declined nearly 3% over that same period.1

Commodities make up more than one-third of the CPI, considered a primary inflation measure. In the one-year period ending in August 2024, commodity prices reflected within CPI declined 1.2%.1

Chart depicts commodities price changes as a percentage from January 2021 – August 31, 2024.
Source: U.S. Bureau of Labor Statistics as of Aug. 31, 2024.

Commodities represent a wide range of assets, including everything from energy and agricultural products to precious and industrial metals. Prices of different commodities can vary, though all tend to be affected by factors such as production levels (supply) and consumer and business demand. Economic factors also tend to come into play. For instance, during global economic recessions, energy demand tends to subside, often driving prices lower.

Economic factors have likely altered commodity price trends. “We’re not getting enough demand growth today,” says Haworth. “There’s significant concern about economic growth in major global economies such as China and Japan that’s weighing on commodity markets.”

What is the likely direction of commodity prices going forward, and how might investors consider positioning their portfolios to reflect these trends?

 

Oil prices level off

Energy prices are among the most visible of commodities, a category subject to significant volatility, often driven by world events. Crude oil prices closed just above $10/barrel in April 2020 as the onset of the COVID-19 pandemic caused a global economic virtual shutdown. Shortly after Russia invaded Ukraine two years later, the price of a barrel of crude skyrocketed to $120, partially reflecting concerns about the availability of oil from Russia, one of the world’s top producers. Yet supplies expanded quickly, and by early September 2024, oil dropped to below $70/barrel for the first time since December 2023.2

Chart depicts actual and projected average monthly price of crude oil per barrel January 2020 - September 9, 2024.
*Price as of September 9, 2024. Price represents spot average for West Texas Intermediate crude oil. Source: U.S. Energy Information Administration, Short-Term Energy Outlook.

“The market seems to have adjusted to OPEC’s reduced production levels,” says Rob Haworth, senior investment strategy director for U.S. Bank Wealth Management. “In the meantime, domestic inventories are rising, which relieves some price pressure.”

Haworth says demand for oil remains relatively constant. The supply side was temporarily stressed as a number of countries associated with the OPEC+ oil cartel extended voluntary production cuts through 2024’s second quarter as a way to keep prices elevated. “The market seems to have adjusted to OPEC’s reduced production levels,” says Haworth. “In the meantime, domestic inventories are rising, which relieves some price pressure.” Haworth adds that OPEC+ countries may be anxious to begin producing oil again at normal levels. “The challenge is they would have to do so at much lower prices based on where the market stands today, and the question is whether they will tolerate lower prices to boost production.”

 

Other commodity prices rise

Agricultural commodity prices surged in 2022, in the Russia-Ukraine war’s early days. “Potential interruptions of grain deliveries from those two agricultural-exporting countries added a degree of uncertainty to the grain commodities market,” says Haworth. Yet he believes that, as is usually the case, weather remains the biggest factor affecting prices for agricultural commodities. Food prices have eased from earlier highs. Prices on key agricultural commodities this year are down. On a year-to-date basis through mid-September, future market wheat prices declined 14.1%, corn prices are down 7.8%, and soybean prices dropped 22.9%.3 For the 12 months ending in August 2024, food costs, as measured by CPI, were just 2.1% higher than a year earlier, slightly below the overall 2.5% inflation reading.1

Metals prices can be considered in two categories – precious metals such as gold and silver, and industrial metals used in manufacturing, such as nickel and copper for electric vehicle batteries. Gold prices dropped to a low of $1,831/ounce in October 2023, but by mid-September 2024 rose to more than $2,500/ounce, a jump of more than 38% in less than one year.4

“While gold prices often rise in conjunction with inflation, the recent upturn in the face of inflation’s decline may reflect significant global central bank gold demand,” says Haworth. “The trend is positive, but with inflation slowing, it’s not certain that it’s a sustainable trend.”

As for industrial metals, Haworth says supply concerns are an issue, particularly with more robust demand driven by increased production of electric vehicles. Minerals such as cobalt and nickel are key components for electric vehicle batteries. “We have longer-term supply issues,” says Haworth, “but in the near term, trade constraints such as tariffs have slowed demand.”

 

Investor considerations around commodities

Investors sometimes consider including commodities in a portfolio to hedge the impact of higher inflation. Commodities may have appeared more attractive when inflation was higher. “The challenge,” according to Haworth, “is that when you invest in a specific commodity, you have to get both decisions right – buying it cheap enough, and having the ability to sell it at a higher price.” Haworth notes that in the meantime, investors are not “paid” in the form of income while they wait to see if prices move higher.

Infrastructure investments also offer opportunities. Options include companies involved in oil pipelines, airports, cell towers, toll roads and other forms of infrastructure. “There is strong demand in many of these areas today,” says Haworth, “but benefitting from owning these investments doesn’t always require that prices move higher. These investments also generate regular income for investors.” Haworth says companies in infrastructure-related businesses tend to have fixed costs but realize bigger profits in times when inflation drives prices higher.

Haworth says commodities sometimes are more effective as a tactical position in a portfolio. “It’s difficult to earn a durable return with direct investments in commodities or commodity futures,” he warns.

Investors should be prepared for frequent changes, both higher and lower, in commodity prices. Talk with your financial professional about opportunities to position your portfolio to capitalize on market trends stemming from the commodities trade.

Frequently asked questions

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Disclosures

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  1. U.S. Bureau of Labor Statistics, “Consumer Price Index for All Urban Consumers (CPI-U): U.S. city average.

  2. Source: WSJ.com, Crude Oil WTI, New York Mercantile Exchange, Front Month price.

  3. WSJ.com, Corn Continuous Contract (CBOT); Wheat Continuous Contract (CBOT); Soybean Continuous Contract (CBOT). As of September 11, 2024.

  4. Wall Street Journal, U.S. Nymex Gold Continuous Contract.

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