Nitesh Shah & Mobeen Tahir (WisdomTree) | In August 2020, commodities had their best monthly performance since April 2016 and second-best monthly performance in the past decade (based on the Bloomberg Commodity Total Return Index). Each major segment of commodities contributed positively to the strong performance, led by Energy (+11.2%). Natural gas was the best performer in that segment, with a 47.6% gain.
The US Federal Reserve (Fed) now “seeks to achieve inflation that averages 2% over time”. Effectively, the Fed will allow inflation to run above 2% (for how long and how high remains unclear) to make up for periods where inflation is below 2%. Inflation expectations based on 10-year Treasury breakevens (difference between inflation protected and non-inflation protected 10-year Treasuries, using Bloomberg data) and 5year-5year breakevens (expected inflation, on average, over the five-year period that begins five years from today, using Federal Reserve Bank of St. Louis data) have risen to the highest in over a year. Commodities are a good hedge for inflation which explains part of the price appreciation seen in the past month.
Additionally, the looser policy setting (relative to other central banks) has been US dollar negative. A weak US dollar will be commodity price positive. The US dollar basket is currently trading at over a 2-year low.In August 2020, the S&P 500 hit its all-time high. Gold also reached a new high, rising to above US$2060/oz on 6th August 2020 (surpassing its previous high of US$1900/oz on 5th September 2011 by quite a margin). That turns the thesis that gold can’t perform when equities are roaring on its head. Although gold has pared back a bit since then, the metal is likely to do well in an environment of plunging bond yields, rising inflation, and weak US dollar. Gold – while not offering any yield at all – is better positioned than many bonds that offer negative yields.Manufacturing Purchasing Manager’s Indices are recovering briskly, with the global gauge showing the output and new orders rising at the fastest rates since April 2018 and June 2018 respectively in August 2020. The upturn was mainly driven by the restarting of production and reopening of clients following lockdowns. With manufacturing a core source of demand for many commodities, these trends if sustained, will bode well for the commodity complex.
Silver takes the lead once again. Gold and silver experienced some price volatility last month as improving economic sentiment briefly caused precious metals to retreat. They have both recovered since then with silver making gains of 13.8% last month.
Natural gas fuelled the energy complex to pole-position in August. A confluence of easing lockdown conditions, warmer weather, hurricane risks and declining supply from oil by-product helped propel natural gas higher.
Another strong month for industrial metals. Gradually improving economic data and reflationary expectations helped the industrial metals complex experience another month of strong gains.
Sentiment drives a strong month for agricultural commodities. A sharp improvement in investor sentiment on account of improving demand conditions has helped agricultural commodities make meaningful gains last month.