Interest rates may be remembered as the dominant investing story of 2023. But commodities have helped move markets and shouldn’t be forgotten.
Relatively lower prices for a range of commodities helped stocks get off to a strong start in 2023. Most market watchers have kept the spotlight on the Fed and interest rates, but certain commodity prices have increased recently, contributing to some stocks turning red for the year.
Here’s what’s been happening in 2 key commodity markets: gold and oil.
In addition to supply and demand, factors like speculation, rates, and dollar strength can influence gold prices as well. For example, gold prices dulled during most of 2022 as interest rates were rapidly rising and the dollar was strengthening. This year, gold's drop in price was attributed to the run-up in bond yields and a stronger dollar by the World Gold Council.
There’s another important factor for investors to consider. $2,000 appears to be a key price level that gold’s been grappling with (see Gold can’t conquer $2,000 chart below). Over the past 3 years, there have been 3 instances of gold rising slightly above $2,000, only to quickly drop below that price level. Recent world events have pushed gold prices back near $2,000, but as of late October, gold has yet to climb above that level.
Gold can’t conquer $2,000
There could be a number of conflicting factors that could keep gold in a tight trading range, according to the October 23 Weekly Metals Market Outlook from The Hightower Report, which can be found on Fidelity.com.
“While the gold market is certainly overbought from the low to high October rally, flight to quality uncertainty looks to entrench in the marketplace [as world events unfold].” The report adds that, “The dollar seems to be missing out on flight to quality buying interest despite surging implied Treasury yields,” which could be bullish for gold prices.
As with most of the market, it’s rates that gold investors may want to closely monitor. “The biggest threat to gold and silver bulls might be higher US Treasury yields, as the latest breakout in 30-year Treasury yields is prompting slowing fear at the Fed and by many economists,” according to Hightower.
Oil seeps into stocks
Meanwhile, oil prices have crept higher over the past several months, and stocks appear to have felt the impact.
The S&P 500 hit a 2023 high in July near 4,600, when oil was trading in the low $70 per barrel range. Beginning in July, oil prices started to rise, reaching a near-term peak above $93 per barrel in late September (see Oil prices have risen from their 2023 lows chart below). Since then, stocks have lost much of the momentum they had during the first half of the year, and in fact the Dow turned negative year to date.
Oil prices have risen from their 2023 lows
Oil market fundamentals, like strong demand, helped drive the September increase in prices. The International Energy Agency (IEA) noted in their September Oil Market Report that higher demand was helping boost prices. “World oil demand remains on track to grow by 2.2 million barrels per day in 2023 to 101.8 mb/d, led by resurgent Chinese consumption, jet fuel, and petrochemical feedstocks.”
But over the past several weeks, oil prices have retreated a bit from their year-to-date highs. The IEA’s October report notes, "Evidence of demand destruction is appearing, with preliminary September data showing that US gasoline consumption fell to a 2-decade low.”
That may not lead to a fall in oil prices though. The October 23 Weekly Energy Market Outlook from The Hightower Report suggests a neutral outlook for oil prices, as the tightening global supply is likely to support but not raises prices. “We are not surprised with a slight retrenchment in crude oil prices [despite the recent geopolitical turmoil],” according to Hightower. “We suspect classic supply factors may be a secondary thought.”
Keep an eye on commodities
The impact of commodity prices is always an important factor for investors across asset classes to consider. Typically, commodity prices are broadly influenced by the business cycle (they generally rise when the economy is expanding and demand is relatively higher, and they generally fall when the economy is contracting and demand is relatively lower). But recent events around the world may exert a greater influence on some key commodities for the foreseeable future.