Commodity prices started 2018 at strong levels on the heels of last year’s strong performance. Prices tailed off as a strong dollar pressured global growth, but recently prices have turned higher on a shortage of physical metal and a gradual return of inflation. The increase in base metals since the beginning of May has helped to drag gold, the global precious metal, toward a nearly seven-year high.
While the shortage in physical metal has already been addressed, the effect is yet to be seen. Although investors are dipping their toes back into physical commodities markets, there is a strong possibility that even a greater supply gap will come on the market in the coming years. Consider the growing demand for LNG, industrial metals, agricultural commodities, base metals, and oil (among others). According to the International Energy Agency, the demand for commodity products alone will grow by 28% between 2015 and 2040.
The factors causing the inflationary environment are likely to persist. Low rates around the world that create economic “risk-off” sentiment and pro-growth forces such as NAFTA negotiations, easing trade tensions, and above all, the end of the fiscal stimulus that policymakers have been trying to stimulate will continue to hurt gold prices, at least for the foreseeable future. The bottom line is that gold remains an under-performing asset class, offering little or no value at current prices.