The outlook for oil, gold and other commodities in 2017

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The world has traditionally looked to China for a steer on demand for commodity prices; now Donald Trump's US presidential election victory has led to hopes of a period of economic growth in the US, which could also lift commodity prices.

Trump has promised generous tax cuts that could be stimulatory for the US economy, as well as significant tax incentives for infrastructure spending. For commodity investors, this could prove a turning point.

For several years now, the majority has been convinced that global economic growth will remain sluggish and that the market for base metals has more or less reached an equilibrium, as a decade of over-investment in mining is gradually reduced and unprofitable production facilities are closed.

Without governments minded to turn on the fiscal spending tap and commit billons to infrastructure, it has been difficult to see why basic material prices should move ahead significantly. Copper, for example, has languished at half its peak price.

RANGE-BOUND OIL

However, base metals did very well in the days immediately after the presidential election, as Trumpland policies began to be factored in; and China has also released some encouraging data.

gold-oil-and-silver-price-predictions'Copper has been about $4,600 a tonne for months, but after the US election it spiked sharply in a few days, so if Trump follows through in the months ahead, it could reach $6,600 a tonne by the end of next year,' says Chris Beauchamp, senior market analyst at IG Group.

Greater growth should also support oil, which is currently hovering around $54 a barrel. However, October output hit another production record, casting doubt on whether Opec's plan to limit oversupply in the market is achievable.

The president-elect is also expected to dial down regulation of the US fracking industry, bolstering supply - which will ensure the upside for oil prices is capped.

John Birdwood, head of discretionary portfolio management at SGPB Hambros, expects oil to remain in the range of roughly $45-$55 a barrel for some time.

'The US shale producers have brought down costs and can now profitably add capacity when prices get over $50 a barrel,' he says. 'Opec is trying to limit output, but given the lack of unity we do not expect it to be effective enough to drive prices up materially.'

OIL AND GOLD INTERLINKED

Oil and gold are inextricably interlinked - traditionally, when the oil price drops, it drags down inflation, and if inflation falls, then that weakens the rationale for investing in gold.

However, year-on-year US inflation figures have been picking up in 2016, from under 1 per cent in March to 1.6 per cent in October, and yet precious metals did well in the first quarter - in fact, gold was the best-performing asset class.

'The biggest marginal investors are exchange traded funds, so if investors collectively decide to invest or divest, then the gold price reacts,' says Tim Cockerill, investment director at Rowan Dartington.

Beauchamp predicts $1,350 per ounce for gold in 2017 as markets are factoring in rising inflation, and a similar climb to $21 per ounce for silver, whose fortunes also depend on whether there is a pick-up in industrial use.

Opportunities are limited in agricultural commodities, such as corn, wheat and soybeans. Prices this year will be suppressed by the bumper harvest, with the largest corn and soybean crops in US history soon to be added to record grain stockpiles.

Longer term, however, the world will need to generate 455 million metric tons of meat a year by 2050.

Overall, there has been greater divergence in commodities in 2016 than predicted, and factors such as uncertainty, momentum, shortages, and disruptions to supply have continued to offer short-term opportunities.

While the long bull market in commodities may have ended, nothing moves in a straight line, and there is always potential to make money in this volatile asset class through tactical trading.

HOW TO BUY THE ASSET

iShares offers physically backed gold, silver, platinum and palladium ETCs, while in the oil markets, one of the cheapest ETFs is ETF Securities WTI Crude Oil, which carries an annual charge of 0.49 per cent.

Popular avenues for accessing industrial metals include the ETF Securities Industrial Metals ETC, listed in London, which is based on a diversified basket of industrial metals.

ETF Securities offers wheat, cocoa, sugar, corn, zinc and other commodity ETFs, or look at a broadly based agricultural index. The Power-Shares DB Agriculture Fund, listed in New York, allocates nearly 35 per cent of its fund to corn, soybeans and wheat.


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