"Commodities Are Paying Off Nicely"... Commodity Index Outpaces the S&P 500

Commodities Up 36% Over the Past Year vs. 17% for the S&P 500
Copper and Oil Rally... Precious Metals Take a Breather
"Diversify Across Metals, Energy and Agricultural Commodities"

While the stock market, which surged sharply early in the year, has lost momentum, commodities have entered an upswing. Energy and copper have led the sharp gains, and some expect precious metals to have further room to rise. However, the factors driving prices vary by commodity, so portfolios should be structured to reflect market conditions.

According to Investing.com, the Bloomberg Commodity Index stood at 142.9435 as of 3 p.m. the previous day, up 36.04% from a year earlier. This was more than double the 17.32% gain in the S&P 500 over the same period.

The factor affecting all commodities was a weaker U.S. dollar. Because commodity prices are denominated in dollars, a weaker dollar makes commodities less expensive for buyers in non-dollar economies. This can boost demand and, in turn, prices. A weaker dollar can also prompt investors to shift funds into real assets such as commodities as an alternative investment. Other factors, including the U.S.-Iran war that broke out early in the year, inflation and interest rate hikes, are also believed to have affected individual commodities.

Precious Metals on a Long-Term Uptrend...Now Taking a Breather

By commodity, gold and silver reached peaks early this year before undergoing a brief correction. Gold futures on the New York Mercantile Exchange rose to $5,586.20 per troy ounce on January 29, but had fallen to $4,215.80 as of October 13. Silver also hit a record high of $121.785 per troy ounce on January 29 and has since fallen to around $60.

Macroeconomic factors, including interest rates, are cited as having influenced gold and silver prices. Gold and silver are representative non-yielding assets. Their appeal increases when the likelihood of interest rate hikes diminishes, but declines when a rate-hiking cycle resumes. Gold and silver prices also briefly weakened amid rising global government bond yields and interest rate hikes by the U.S. Federal Reserve.

However, even after short-term corrections, gold and silver have typically followed a long-term upward trajectory. They are classified as precious metals because of their scarcity, and are considered representative safe-haven assets. Continued gold purchases by central banks around the world, along with silver's role as both a safe-haven asset and an important industrial material, are also drivers of price gains.

Gold prices, which had recently been falling, are now poised to rebound. An official in the financial investment industry said, "Gold weakened amid the steady rise in U.S. interest rates, but recent U.S. employment figures came in well below expectations, dampening expectations of another rate hike at the October Federal Open Market Committee (FOMC) meeting. A rebound in gold prices is therefore a very plausible scenario." The official added, "The U.S. Consumer Price Index (CPI) for September, due to be released on October 14, and the outcome of the FOMC meeting on October 28 are expected to have a major impact." Park Juran, a researcher at Samsung Securities, also highlighted the CPI results, saying, "Unless inflation rises sharply, structural demand from central banks is expected to provide a floor for prices."

Oil and Copper Whipsawed by Supply and Demand

By contrast, commodities such as copper and crude oil have repeatedly fluctuated in response to factors such as geopolitical conflicts and supply and demand. Copper is a recent example. Copper futures on the New York Mercantile Exchange set a new high of $6.9285 per pound on September 22 and have remained elevated at around $6.70.

Strikes at mines in Chile, the world's largest copper-producing country, have brought supply-side risks into focus. The strikes have compounded existing concerns stemming from investment that has been halted since the 2010s due to oversupply. The Centinela mine in Chile went on strike on October 7 local time, and labor-management negotiations are also under way at Escondida, the world's largest copper mine, raising the possibility that supply risks could spread to multiple mines.

Copper also faces strong long-term demand as a resource needed to advance AI. Choi Jinyoung, a researcher at Daishin Securities, said, "AI requires more than nine times as much electricity as traditional search engines, meaning it needs large amounts of energy. It also requires ultra-high-voltage transmission facilities to minimize transmission losses, and this means that five to seven times more copper is used than in conventional power grids."

Energy commodities such as crude oil and natural gas continue to carry a premium stemming from the geopolitical conflict between the United States and Iran that began in March. West Texas Intermediate (WTI) crude surged to $119.48 per barrel on March 9 and has fluctuated since. It fell to prewar levels when hopes for ceasefire talks grew, but has since climbed back to around $90.

Kim Gwangrae, a researcher at Samsung Futures, said, "Expanded Houthi attacks on Saudi Arabia and the attack on a tanker in the Strait of Hormuz have once again heightened concerns about the security of Middle Eastern oil exports, offsetting increased Russian diesel supplies and hopes for a ceasefire between the United States and Iran." He added, "No major new production disruptions in Saudi Arabia have been confirmed, but persistent attacks by Houthi forces are fueling concerns about a decline in Saudi oil exports, providing strong support for the floor under oil prices."

Some expect this commodity upswing to continue for the time being, with leadership shifting from one commodity to another. Kim Minsu, head of the Global ETF Management Team at Mirae Asset Global Investments, said, "Supply-side constraints, including disruptions to supply from the Middle East, insufficient investment in mines and supply-chain fragmentation caused by tariffs, are unlikely to be resolved in the short term. They have raised the floor for commodity prices compared with the past." He added, "We expect a rotation in which the bull market led by energy this year gives way to metals after interest rates peak, particularly precious metals, which have been taking a breather."

He recommended diversifying investments across commodities. "Based on weekly returns since last year, the correlation between crude oil and metals has been effectively zero, while that between agricultural commodities and metals has been around 0.1 to 0.2," Kim said. "Simply allocating investments across metals, energy and agricultural commodities rather than concentrating on a single commodity can provide substantial diversification. It can also help mitigate inflation risks that bonds alone may not be able to hedge in an environment where inflation remains in the 3% range."

This content was produced with the assistance of AI translation services.