Will commodities be the best-performing assets in 2023?

Will commodities be the best-performing assets in 2023?

Investors who are interested in getting the most out of their investments in 2023 and beyond should consider commodities as a possible option. Recent trends suggest that commodities could be one of the top-performing assets in 2023, making them a wise choice for savvy investors looking to stay ahead of the competition.

Commodities on the bull run

Commodities generally fall into three categories: energy, metals, and soft commodities. Energy includes oil, natural gas, and more; metals include precious metals like gold as well as industrial metals such as copper and aluminium; and soft commodities consist of agricultural products such as grains, livestock, and coffee.

Source: IndexMundi

First, let’s take a look at the performance of commodities in recent years. Commodities have been bullish since the pandemic. Energy and metal commodities in particular have been on a strong upward trajectory in the last few years and are expected to remain so in 2023.

According to several studies, commodities have outperformed stocks, bonds, REITs and treasury inflation-protected securities over the past decade. This is especially true when it comes to energy products such as oil and natural gas, metals and minerals such as gold, copper, and lithium (optional few others like platinum group elements and cobalt), and even agricultural products such as wheat and corn, even though agricultural commodities usually remain soft and for a good reason.

Source: S&P Dow Jones Indices as of Oct 2022

Why are commodity prices rising?

The next question to ask is why commodities have consistently outperformed other investments over time. The answer is simple: commodities are finite resources, meaning that their supply is limited and demand will remain relatively steady. This means that when the price of these commodities increases, there is less risk associated with them as an investment than other traditional investments such as stocks or bonds.

It's worth noting that factors like geopolitical tensions particularly the Russian invasion of Ukraine, Covid induced supply chain issues and weather conditions have certainly impacted commodity prices; however, with an ever-increasing population leading to greater pressures on resources such as energy or water, these asset classes are set for some exciting times ahead.

The S&P GSCI Total Return Index is an index that tracks 24 different commodities ranging from metals to energy sources such as oil and natural gas. This index is seen as a reliable indicator of how commodities are performing in general and has been used by many financial professionals when making their forecasts about commodity prices. According to Goldman Sach’s report, this index is expected to rise by 43% in 2023 due to prevailing macroeconomic conditions and increased demand for certain products related to these commodities like cars or electronics.

In 2020, Goldman Sachs Group Inc. released their forecast for the future prices of commodities predicting a multi-year commodity super cycle. Goldman Sachs is still backing their 2020 outlook for 2023, in spite of energy prices dropping down to around $80 per barrel.

According to analysts at Goldman Sachs despite an impressive increase in the prices of commodities throughout 2022, companies did not experience the expected surge in capital expenditure. This forecast has been supported by other financial firms such as JPMorgan Chase & Co and Citigroup Inc, who both predict similar rises in commodity prices over the next three years.

Many experts say that the lack of investment in new mines and oil fields due to reduced demand since the pandemic has led to reduced stockpiles and higher demands. This lack of capital expenditure means that supply shortages will remain sticky in the long term, leading to higher and more volatile prices. This unexpected outcome demonstrates that extraordinary prices are still unable to create sufficient supply as shortages continue on-trend.

According to Bridge Alternative Investments Inc., the leading 15 commodity-focused hedge funds have seen a huge boost in assets this year, with total assets rising to an impressive $20.7 billion—a 50% increase from last year! This indicates the growing interest in commodities as an attractive and profitable asset class among professional investors.

Goldman Sachs is predicting the first quarter of 2023 to remain soft but third to fourth quarters are likely to see Brent Crude climb up to $105 per barrel, copper to jump up by 19.6% to $10,050 per ton and Asian benchmark liquefied natural gas rising up by almost 60% to $53.10.

Investor Takeaway:

Wall Street banks are continuing to show "extremely bullish" sentiment towards commodities due to the undersupply of new capacity in the market, combined with a backdrop of soaring demand. China's reopening efforts, coupled with signs of stagflation in an economy burdened by slowing global interest rate hikes until 2023 provide further fuel for this sentiment.

Sovereign Resources encourages investors to view commodities as their own form of insurance - protecting themselves against the risk posed by rising inflation expectations over time.

From short-term gains to long-term investments, commodities offer unmatched stability and potential growth when compared to other asset classes. Investors who understand how investments work and can make accurate predictions will be able to take full advantage of these opportunities in 2023. With knowledge of investment processes and reliable predictions about commodity markets, significant returns can be obtained from these valuable sources of income.

The future of commodities looks promising. With careful planning and smart decision-making, investors are sure to reap the rewards.