Recently, producer price growth hit a record on a year-over-year basis while consumer prices hit a 14-year high. Although this has been bad news for cost-conscious consumers, it has been good news for commodity producers and investors looking for the best commodity ETFs.
Indeed, soaring food and fuel prices over the past several months have caused many investors to reevaluate commodities in general. While commodity trading and investing can seem intimidating to equity-minded market participants, ETFs that trade like stocks have made participating in a commodity bull market a lot easier (and cheaper) for most investors. Here we’ll discuss the longer-term outlook for some key natural resources, as well as some of the best commodity ETFs that make it simple to track these trends.
A key reason why the prices for most goods are rising is the supply-chain bottlenecks of the last couple of years. Covid-related labor shortages were among the reasons for the supply problems of 2021, and many experts believe this problem will continue into at least the first half of 2022, which will likely keep upward pressure on commodity prices.
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The Commodity Super Cycle
Then there’s the long-term “super cycle” for commodities that many analysts believe to be still in the early innings. Goldman Sachs’ top commodity analyst, Jeff Currie, says this cycle—combined with tight global supplies—will likely keep industrial commodity prices, in particular, elevated for many years ahead.
One commodity that should benefit from this bullish long-term cycle is copper, which is one of the most economically important metals due to its wide use in construction and general manufacturing (Goldman, incidentally, is also predicting an intermediate-term copper deficit, which should bode well for copper prices in the coming months).
Goldman’s Currie sees copper and other industrial metals prices booming as governments around the world spend more on “green” infrastructure goals. His year-ahead price target for copper is $12,000 per ton, which implies a 25% gain from current prices.
The driving forces behind this anticipated industrial metal strength are easy to discern: higher global growth expectations (as pandemic restrictions presumably loosen in the coming year), a strong real estate market (where copper is widely utilized) and continued inflation.
Each of these factors are expected to persist in 2022 (notwithstanding the near-term threat to the global economy posed by the omicron variant). Moreover, according to analyst John Mothersole of IHS Markit, copper has entered a fundamental deficit due to increased consumption growth, in addition to recent copper mine disruptions.
Additional factors which should contribute to a strong intermediate-term outlook for the red metal include the lingering effects of the past year’s supply-chain disruptions. And while analysts expect overall copper consumption growth to moderate in 2022, refined production growth is anticipated to increase by more than 5% (from under 4% this year), based on projections by consultancy IHS Markit.
The 3 Best Commodity ETFs to Invest in Now
One of the best commodity ETFs for participating in a copper bull market is the Global X Copper Miners ETF (COPX), which seeks to provide investment results that correspond to the price and yield performance of the Solactive Global Copper Miners Total Return Index. While COPX was stuck in neutral for much of last year, I anticipate that improving copper fundamentals will eventually push this ETF upward and out of its trading range in the coming months.
A case can be made that commodity prices—particularly crude oil—overshot on the upside during 2021 due to the outsize influence of the past year’s supply-chain disruptions and other factors relating to the pandemic. And while there will probably be a broad commodity market “correction” at some point later in 2022 (given the extraordinary runup in prices since 2020), the dominant longer-term trend for commodity prices in the aggregate has clearly turned up.
Moreover, rising consumer and producer prices will almost certainly remain a problem in the first half of 2022. Crude oil prices in particular remain elevated, and the energy sector bull market shows no signs of ending anytime soon. For that reason, I expect the Invesco DB Commodity Index Tracking Fund (DBC), which is heavily skewed toward the energy sector, to be one of the top performers of the first half of the New Year.
A final consideration for 2022 is the likelihood that agricultural commodity prices (including grain and meat prices) will continue rising. A combination of strong global demand for ag commodities, exceptionally volatile weather in many food-growing countries and rising input costs (i.e. fuel and fertilizer) should contribute to rising prices in the ag sector.
One of the best commodity ETFs for tracking ag is the Invesco DB Agriculture Fund (DBA), which follows changes in the level of the DBIQ Diversified Agriculture Index Excess Return Index. That particular index is comprised of futures contracts on some of the most liquid and widely traded agricultural commodities. I also have bullish expectations for DBA in the New Year.
With the fundamentals for several major commodities looking better than they have in years, investors should consider having some exposure to commodity-related stocks and the best commodity ETFs. The tracking funds mentioned above are a good place to start for participants who agree with me that a new commodity market super cycle is likely underway.
If you want even more ideas for the best-performing precious and industrial metals stocks and ETFs right now, please consider subscribing to my Sector Xpress Gold & Metals Advisor, where I regularly provide you with some of the market’s strongest metals and mining stocks/ETFs from both a technical and a fundamental perspective.
What commodity plays are you considering for this pending super cycle?
Clif Droke is Chief Analyst of Cabot SX Gold & Metals. For over 20 years, he has worked as a writer, analyst and editor of several market-oriented advisory services and has written several books on technical trading in the stock market, including “Channel Buster: How to Trade the Most Profitable Chart Pattern” and “The Stock Market Cycles.”Learn More