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Gold and oil update

Commodities like oil, gold, and other metals have had a good 2019 thus far.

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Key takeaways

  • It's been a strong start to 2019 for most commodities.
  • Oil is the top performing commodity thus far this year.
  • You can find energy, metals, and other commodities research on Fidelity.com.

Persistent fears of a global economic slowdown and the much talked about yield curve inversion have somewhat darkened the investing landscape recently. The 10-year US Treasury yield just dipped below the 3-year US Treasury yield—this is known as a yield curve inversion and is a recession indicator, according to some market watchers. Yet global stocks are still off to a good start in 2019—the MSCI World Index is up 11%, as of late March.

Most commodities have been bullish as well, with the Bloomberg Commodity Index up 6% thus far this year (see Commodities on the rise chart). Here are some of the trends that have been driving oil, gold, and other metals, and what might be on the horizon for these markets over the short term.

Oil gushes out of the gate

The prices of oil, natural gas, and other energy products have a wide-ranging impact on the global economy (and vice versa). In addition to their role as a product of oil and gas producing companies, energy is a significant input cost for businesses like airline, shipping, and transportation companies, among others. Moreover, gas and heating oil costs impact the bottom line for most businesses to some extent, as well as the disposable income of consumers. Consequently, monitoring developments in the oil field can benefit investors across a wide landscape.

During 2018, oil prices fell on concerns of slowing global growth—topped off by a 40% plunge during the last quarter of the year. It's been a different story so far in 2019. After finding a bottom in early January, West Texas Intermediate crude oil recently hit $60 per barrel, a 30% increase year to date.

Announced supply cuts by OPEC (the Organization of the Petroleum Exporting Countries, a 14-nation intergovernmental group composed of many of the largest oil producing countries in the world) helped oil prices dig out a bottom.

Also, worst case fears regarding poor global growth not coming to fruition have helped push prices higher. Earlier this year, the International Monetary Fund forecasted global growth to be 3.5% in 2019, and 3.6% in 2020—down slightly from 3.8% in 2018, but not as bad as some investors feared. Even though late-cycle conditions have taken hold for many developed countries (which could lead to more uncertainty and volatility this year), recession risks remain low in countries like the US.

Active investors who monitor the short-term price of oil have several factors to think about. A recent note from The Hightower Report, a futures analysis and forecasting report, points out that the seasonality effect may help underpin oil prices near their current price level as the weather warms and the so-called "driving season" unfolds—a time frame which typically results in stronger demand for gasoline.*

With that said, the report suggests the market seems to have already "discounted Saudi budget needs of $70 oil and a sharp upward price projection revision, which suggests that any break in prices directly ahead will have to be countered by some fresh OPEC threat." The report also notes that the latest Commitments of Traders report "registered a significant single-week jump in spec long positions, and that might feed a correction."

Hightower expects warmer weather to continue to pressure natural gas prices over the coming months, while moderating that expectation by citing a large purchase by China of LNG (liquefied natural gas) vessels from a French company as a glimpse into potential future demand.

You can access this report, and other energy market commentary, on Fidelity.com via the Markets & Sectors research page.

Gold, metals shine

Precious metals (like gold, silver, platinum, and palladium) have less of the ubiquitous impact on economic activity compared with energy products. However, they are among the primary products of mining companies and construction materials companies, and serve as key inputs for a range of consumer goods such as jewelry producers, among other uses. They can also provide information about investor confidence (specifically gold).

Gold isn't having near the start to the year that oil is, with the price of the former up just 3% thus far in 2019. However, since a near-term bottom in August of 2018, the precious metal has rebounded 12%. Of note, gold has had a mostly inverse correlation with the S&P 500 over the past year, perhaps reflecting its perceived role by many investors as a hedge against recessionary risks (see Gold has had a negative correlation with the S&P 500 chart).

Of course, this recent relationship is not to say gold has an inverse correlation with stocks, and in fact the long-term correlation range is very wide. While investor sentiment may play a role in influencing gold and other precious metal prices, it's important to understand the fundamentals of supply and demand that are helping dictate metal price movements.

In a recent note from The Hightower Report, overnight gold purchases by central banks totaled 126 tons in the 1st quarter, according to Morgan Stanley, and "a 4-quarter tally at that rate would represent the highest purchase rate since 2015." Such an outcome would have bullish implications for gold prices. The report also says "gold has been able to forge gains despite periodic strength in the dollar," and that "silver will continue to hold onto gold's coattails, (although) too much deterioration in macroeconomic sentiment and broad-based deflationary action in other commodities could result in silver negatively converging with gold."

Industrial metals, which play a more diverse role in economic activity compared with their precious metal counterparts, are having a better 2019 than the likes of gold and silver. Industrial metals are an input for a wide range of products—including home construction materials, automobiles, electronics, and more. Industrial metal prices that plunged in 2018 on concerns over trade and global economic growth have been boosted by resilient demand, tight supplies, and some signals of an improving economy in China—the world's largest metals buyer.

A Bloomberg gauge tracking total returns in copper, aluminum, zinc, and nickel advanced the most in the first 2 months of the year since early 2008. More recently, some of these metals (like copper, which is trading near $6,339 a tonne) have weakened over the last month on some global growth concerns and the lingering trade dispute between the US and China.

The Hightower Report lists both bullish catalysts for copper (potential supply disruptions in Australia from storms/flooding and a roadblock of a Peruvian copper mining operation, as well as a Morgan Stanley forecast for a global supply deficit) and bearish headwinds (overhanging fears of global slowing, plus the potential for ongoing long liquidation/stop-loss selling). Depending on how the copper market develops, Hightower hints that copper may not trade directionally if these forces counterbalance one another.

You can access these reports, and other metals market commentary, on Fidelity.com via the Markets & Sectors research page.

Investing implications

Many investors fail to consider the diversification role that commodities (and other alternative investments) can play in their investments—either directly through investing in physical commodities or commodity derivatives, or indirectly through the producers of commodities. Choosing a mix of different kinds of investments and maintaining that mix are among the most important ingredients in your long-term investment success. This means creating an investment mix based on your goals, risk tolerance, financial situation, and timeline; and being diversified both among and within different types of stocks, bonds, and other investments. If appropriate for your objectives and risk constraints, commodities can be one of those other types of investments that can help diversify your portfolio.

Given some of the complexities involved with commodities, and if you are thinking about adding these investments to your portfolio, you may want to consider professionally managed commodity funds to gain exposure to commodities in your portfolio. Even if you aren't considering investing in commodities or commodity-related products such as mutual funds or ETFs, monitoring markets like oil, gold, and other metals may help you better manage your stock and bond positions—given their wide-ranging impact.

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