Commodity markets are often said to have a mind of their own, and the past year would appear to validate this point. The two most followed commodities, oil and gold, have both seen very high volatility numbers – although the performance has been in polar opposite directions.
Investing in gold remains one of the most controversial exposures for an investor, as it is arguably a greater fool investment that is said to be fuelled by three persuasive themes: fear of an economic crisis or inflation outbreak fuelling public demand, a change in the sovereign wealth funds asset composition, such as demand from China, to diversify their holdings; and negative bond yields losing their appeal as an effective hedge against equities.
The popularity of gold is evident as it has increased 26.5% in the year to July and is the strongest performing hard-commodity over most extended time-periods. The question is whether gold is a valuable inflation-protector or an asset with no underlying value.
Oil is arguably more important from an economic perspective, as it is a key driver for inflation numbers. Most estimates indicate that a 10% rise of oil prices lifts inflation by 0.1% to 0.3%. Therefore, the tumultuous record of oil is putting the market in a spin, with the price of Brent Crude up 22.2% over six months but down 14.5% in July. WTI Crude has performed marginally better given it has greater United States exposure, although the numbers are similarly volatile.
The latest projections by OPEC show an expectation for re-balancing by year-end, although this will be worthy of continued investigation. It is important to remember many of the world’s economies were in “a state of emergency”, such as Venezuela and to a lesser extent Russia, early this year and they will be relying on increasing the supply of oil to extract themselves from the pit.
This is a fast-moving series of events, and OPEC will be centre stage. There is an informal meeting next month involving OPEC and Russia which may provide more clarity, however in the meantime investors must acknowledge the importance of oil and the difficulty to predict it.
