The Commodity Market in 2021: How Things Stand

Apr 28, 2021 07:08 PM ET
The Commodity Market in 2021: How Things Stand

Even while the global economy was struggling to stay afloat, the price of commodities saw a sharp rise in values starting from March 2020. Although the majority of commodities have appreciated in value since that time, the real question is whether this trend will continue and which commodities have emerged on top. Here, we shall take a look at the last year and talk about some commodities worth investing in.

A look at the previous year

The pandemic situation has created a scenario of financial uncertainty, and this has enhanced the appeal of commodities for traders. Since the prices are on a steady rise, the beginning of a supercycle cannot be counted. Traders worldwide have had to modify their market schemes drastically due to the pandemic since international stock exchanges have witnessed uncertain movements.

Not everything has been bleak for the commodity market last year, however. For instance, gold touched the value of $2,000 per ounce in the month of August, forming an all-time high. This represented a rise of 16.8% in terms of American dollars, and it was mainly caused by low bank rates. 

When the value of the dollar goes down, gold acts as insurance, so it has a history of price appreciation whenever the dollar has weakened. Another commodity that rose in value is silver, and at the beginning of August, it reached $30 per ounce, the highest value in over five years. Silver has found widespread usage in industries, including those manufacturing solar panels.

This tells us that the average investor is more likely to diversify their investment in the current market. By putting money on unconventional securities, it is possible to trade with lower risk while enjoying other benefits like more opportunities for steady income, low volatility, and protection against unfavorable market conditions.

What should you invest in?

We will consider a few commodities to look out for in 2021 now.

  1. Crude Oil

Crude Oil

There are some traders who feel that investing in crude oil is not worth it due to environmental restrictions and capital discipline. Others feel the oil producer groups are capable of reinforcing the supply. As per JP Morgan, oil prices are unlikely to shoot up beyond $100 per barrel in the future since US shale is having trouble meeting the imminent capex inadequacy.

It is likely that the unfulfilled demand may be recovered in the second half of 2021, but at the moment, the supply is less than the demand. Before the pandemic, the US oil output was 11 million barrels per day, and later it got lowered by 2 million barrels per day.  This, combined with bankruptcies and the dismal economic conditions, has raised questions about whether US shale can deal with the deficit this time around.

OPEC, an organization, comprising of all-producing countries, will have an important role to play in the future value of crude oil. Currently, the price is such that the minor US bodies could re-enter the market and encourage upstream investment for the lengthier cycle.

  1. Gold

 Gold

In 2020, gold yielded a solid return of 23%. In 2021, the trend is likely to persist due to falling interest rates, falling dollar rates, financial institutions introducing stimulus measures, and the overall panic due to the new virus strain. Due to the trillions of dollars worth of stimulus introduced internationally, it will take a minimum of 1-2 years for the central financial institutions to repay their debts and stabilize their balance sheets.

In 2021, we can expect the ETF inflows and central banks purchasing gold. There is increased demand from countries like India and China, so you can expect gold prices to appreciate significantly. It has the potential to outperform equity this year, as the risk is minimized and the return is maximized through demand from financial institutions and fund managers.

  1. Copper

Copper

Although copper futures sunk by 20% in March 2020, it soon took a bull turn. In the month of July last year, copper reached a record high and yielded a 34% return to become the base metal with the best performance. Currently, copper price shows no sign of losing momentum, and as per price action analysis performed on monthly and weekly charts, the trend is still upwards. 

  1. Soybean

In 2020, soybean futures performed really well, exhibiting a 40% appreciation in price. When the pandemic situation started in April, the price per bushel was quite low for soya bean, but then it recovered due to import demand from China, low harvest in the USA, etc. After the change in presidency in the US, soybean sales can slow down unless Biden convinces them to lift the tariffs on soybean exported from the US, but Bank of America predicts prices to shoot further up this year.

What we can expect in the future

With the prices of commodities rising steadily and with the relief packages launched by financial bodies, experts have predicted a commodities supercycle. When the value of a commodity grows, you can see inflation rising through mediums like the Commodity Price Index. One of the reasons behind the appearance of the supercycle is the pandemic which led to the weakening of the dollar as well as a price boost for commodities. 

In this supercycle, you can expect the price of commodities to remain above the trendlines for long periods of time. 

The new market routes

There is an effort underway to make commodities more accessible to new investors. Risks can be significantly lowered by doing away with structured products. Tokenization will transform commodities into digital securities, so you will be able to trade them effortlessly.

Wrapping up

So while you can be sure about the growth of certain commodities in 2021, others are based on various factors that you need to carefully monitor. The ongoing COVID-19 situation will play a huge role in determining the price of commodities this year as well.


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