Commodities strengthen into midyear as demand for hard assets heat up

Broad gains despite macro headwinds

The double-digit year-to-date return on the index, which comprises 24 major futures markets, split almost evenly between energy, metals, and agriculture, excluding platinum, the current star performer on 40%, has, as mentioned, been achieved despite heightened economic growth concerns, especially in the US and China, the world’s top consumers of raw materials. In the chaotic days that followed Trump’s “Liberation Day” tariff attack on major trading partners, the index suffered a top-to-bottom drawdown of 9% before embarking on a recovery that now has led to a fresh high being reached, and in the last week supported by gains across all three sectors, led by crude oil, fuel products, gold, silver, soybeans, and wheat. Note: besides platinum, the star performer, the bottom three are not included in the BCOM TR Index. 

In comparison, the S&P 500 trades up by less than 2% and the Nasdaq by around 3% after suffering significant February to April drawdowns of 19% and 23%, respectively. Highlighting the reasons why a diversified approach to commodity trading and investment reduces the overall volatility, making it easier from a risk management perspective to maintain an exposure through peaks and troughs.

Precious metal: Safe-haven star performers

Precious metals are leading the charge, with platinum, gold, and silver at the top of the performance table. Silver recently broke above USD 37 per ounce, its highest level in 13 years, while platinum is up more than 40% year-to-date after breaking a 17-year downtrend last month. Gold, which back in April hit a record high at USD 3,500, has moved into a consolidation phase while awaiting the next potential bullish trigger.

Despite the current lull, bullion continues to attract strong demand from central banks and long-term investors concerned about sovereign debt, inflation risks, and the weakening US dollar. Despite silver’s recent period of strength, the gold-silver ratio remains elevated near 91, well above its 5-year average closer to 80, highlighting silver’s relative catch-up potential if macro and technical tailwinds persist.

With Iran vowing to respond with missiles and drone attacks and rising fears of US involvement in strikes on Tehran and its underground nuclear facilities, the escalation has once again raised fears of broader conflict in a region responsible for a third of global oil output. Tensions around the Strait of Hormuz—through which over 20 million barrels of oil transit daily—are the main focus. Pricing a market that on balance—without a disruption—should trade closer to or below USD 70 is difficult, which is why the options market is increasingly being used by professionals to hedge the outside chance of a disruption spike, with the cost of buying calls now exceeding puts by a bigger margin than they did after Russia’s 2022 invasion of Ukraine.

Agriculture: Biofuel link, weather, and short covering offering support

Agricultural commodities continue to trade mixed, with a small 2.3% year-to-date gain in the Bloomberg Agriculture Index being primarily driven by strength across the livestock sector, while the index-heavy grain and soybean sector trades close to flat on the year. However, just in the past week, some strength has emerged with soybeans and corn catching a bid on the back of stronger energy prices, given the crop's role in the production of biofuels, while CBOT wheat touched a one-week high after a slow start to the US winter wheat harvest. Speculators—net short in wheat for three consecutive years—were forced to unwind positions, despite the broader grain complex still showing mixed performance year-to-date. Together with an extended short position in corn, traders of these two crops will look for signs of additional strength, forcing additional short covering from a technical and momentum-driven perspective.

Looking ahead: Risks to second-half momentum

Finally, it’s worth mentioning that while we see the commodity market being in the early stages of a multi-year super-cycle, several obstacles may prevent the sector from achieving a similar return in the second half. The energy sector may turn lower on a solution to the Middle East war, while the global economic impact of Trump’s tariff war, especially in the US, may have a dampening impact on the global economic outlook. Inadvertently, if materialise such weakness may drive down the dollar further while triggering a fresh round of US rate cuts, thereby supporting demand for hard assets through a reduction in the cost of holding a non-coupon or dividend-paying asset.

A new multi-year super-cycle in motion?

During periods of balanced demand and supply dynamics, commodities can go years without offering a return, but once a theme emerge they often evolve into so-called super-cycles:

• 1960’s to 1990’s: End of Bretton Woods and Oil Shocks (780% increase)
• 1990’s to 2020: Industrialisation of China and India (470% increase)
• Started in 2020, a potential new super-cycle driven by six Ds: decarbonisation, deglobalisation, defence spending, de-dollarisation, demographics and urbanisation as well as droughts/climate change.