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Will the Rally in Commodity Markets Sustain?
Mon, 1 Aug Pre-Open

There is a lot of speculation about where the commodity prices are headed next. Crude oil prices have been on a roller-coaster ride recently after being in the doldrums during the early months of the year. Precious metals have turned the safe-haven bets amid global volatility. Major global developments - such as Brexit and weak US economic data - helped these metals garner plenty of gains. And guess what? The good times for these commodities are going to continue ahead - at least as per the projections made by the World Bank.

An article from the Business Standard states some key details from the Commodity Markets outlook for July that has been published by the World Bank. Let us jot down some of these points briefly and answer what lies ahead for the commodity markets.

As per the outlook, the World Bank opines that there is much optimism left for commodity prices in the second half of 2016. This is confirmed with its upward revision for many commodity prices during the abovementioned period. It has also noted that while some commodities might end the year with a lower average price than in 2015 but on the whole, prices have already seen a bottom.

Limiting our focus to individual commodities, the positive trend is said to be witnessed for energy, non-energy, crude oil, silver and gold.

As regards precious metals - the tag crowned by gold and silver - prices are expected to rise 8% during the second half 2016. This, as per the outlook, will be seen on the back of stronger investment demand. However, the outlook also spells a conservative cast. It states that these metals could see a decline with the tightening of US monetary policy and a strengthening dollar ahead. Being on the topic of precious metals, Asad Dossani, editor, Profit Hunter, has penned an article that illustrates how one can make money trading gold.

Moving on to energy prices. Crude oil surged around 30% in the second quarter of 2016. The outlook states that this uptrend will also be stretched in the second half of 2016. Crude oil forecast for 2016 is being raised to US$ 43 a barrel. This marks an upward revision from the April assessment, where the growth outlook was set at US$ 41 per barrel. Moreover, in 2017, the price is expected to be US$ 53 a barrel. This marks an upward revision of 23.7% as compared to the April projection of US$ 50.

Last on the list are agri-commodities. Agricultural prices have been revised upwards by two percentage points. However, they are still projected to average marginally lower in 2016 than in 2015.

For the other side, the outlook for fertilizer and metal & minerals is still negative.

So far, so good. The above data seems to be a welcome breather for most of the commodities in the coming days for this year. This, if turned true, will definitely bear an impact on various businesses that operate in or are intricately linked to the abovementioned commodities. But will the rally sustain?

We think that it would be too early to conclude that. This is because there are still many headwinds that remain ahead for the global economy.

The projections may provide some room for the uptrend in commodities space. However, eventually the prices should converge to their intrinsic value.

What one shall understand is that commodity prices are influenced by many global factors. The prices of many commodities may be stable right now. But historically they have been volatile. So one shall not assume that today's price and next year's price will follow a similar trend.

Also, we have never believed in betting on such macro forecasts. One should instead follow a bottom-up approach to stock picking that focuses on the analysis of individual companies rather than the economy as a whole. Picking stocks solely on the price outlook of a commodity, on the other hand, can always be risky.

One can be better off by focusing on fundamentally strong companies, that have exposure to the above commodities, whenever available at beaten down valuations.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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Jan 19, 2018 (Close)