Which Is a Commodity Someone Might Invest in for Growth
The S&P 500 (SPX) just finished its worst start to a year in over 50 years. On the other hand, although commodities are down this month, they still lead the market in 2022. The outperformance is leading investors to ask, which is a commodity someone might invest in for growth this year?
The big headline rocking the stock market is the rising cost of energy. For example, Natural Gas prices are still up over 55% from last year. And oil prices remain above $105 a barrel, up 45% from 2021.
Meanwhile, recession fears are halting the brakes on the commodity market run. After gaining 48% in 2022, the Invesco Commodity Index (DBC) is down over 12% from its highs.
Supply and demand drive commodity prices. So, prices often go through violent swings when there is an imbalance. The imbalance is a major part of the reason commodities like gas and oil are outperforming the market.
The Russia/Ukraine war is impacting global energy prices as many resources come from the region. For example, Russia is the second-largest global supplier of crude oil.
With this in mind, which is a commodity someone might invest in to take advantage of the higher prices? Keep reading to learn more about these investments and what to expect from the market next.
Which Is a Commodity Someone Might Invest In?
Many commodity prices are falling drastically this month. As a result, investors are speculating on what will happen next. Will we bounce? Or has the market topped?
For one thing, supply constraints are still there. It can take years to increase output in some instances. But, with the fed raising interest rates, can it balance demand? Higher rates are already cooling prices.
For example, the core PCE price index fell for the third straight month in May. The index is the Fed’s preferred measure of inflation and excludes energy and food.
Commodities are often split into three categories.
- Metals
- Energy &
- Agriculture
Let’s take a closer look at each group to see why prices are up in the first place and if a pullback is warranted.
3. Metals
When you think of investing in metals, the first thing that comes to mind is usually gold or silver. And these can be great investments during difficult times. For example, geopolitical tension, high inflation, and economic uncertainty often lead investors to buy precious metals.
Precious metals include gold, silver, and platinum. Gold, in particular, is seen as a “safe haven” asset. To illustrate, the SPDR Gold Trust (NYSE: GLD) is flat in 2022 compared to many holdings down over 20%.
But precious metals are only a part of the metals group. Industrial metals, on the other hand, are used to produce goods. A few examples include:
- Copper
- Steel
- Aluminum &
- Lead
The most important thing to know about metals is what drives demand. For instance, industrial metals see higher demand when economic activity rises. If construction, automotive, and manufacturing picks up, more metals are needed to match the higher output.
At the same time, investors pile into precious metals to protect returns during stressful times. A great way to view the relationship is through the copper-to-gold ratio.
Copper is widely viewed as one of the most used industrial metals. Therefore, higher copper prices often means rising global economic activity.
After surging during the pandemic, the ratio looks to be breaking major resistance. The fallout could be a sign of slowing activity. For one thing, copper is often more sensitive to changes in interest rates.
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Which Is a Commodity Someone Might Invest in Right Now
With many assets down over 20%, many are questioning which is a commodity someone might invest in right now?
Over the past month, many commodities have joined the bear market. Does this mean the rally is over?
Not necessarily. But the main focus should be on energy. Metals are selling off as fears of a recession start to kick in. and Agriculture is falling as supply catches up. Finally, energy is also down on recession fears.
Higher interest rates are starting to slow demand. But, if a recession happens, we will likely see further destruction of demand. Keep in mind that supply and demand drive prices. During a recession, economic activity slows, and consumers have less to spend.
At the same time, there’s reason to believe the energy rally may not be over yet. Prices have come down, but they remain elevated. On top of this, many energy stocks are sitting above their 200D SMA.
The Fed’s ability to crush inflation will determine much of what happens next. If they are successful, commodities will likely be due for a pullback. But, if not, the inflation trade may not be over yet.
