Copper, Gold, and Lean Hogs could be the three best commodities to consider trading through Q4.
Commodities trading has seen a surge of interest in 2022. As the western world slowly crept out of interminable lockdowns, the resulting rush of demand was exacerbated by Russia’s invasion of Ukraine at, compounding commodity volatility.
Many of the most popular commodities affected by the war struck record highs — including oil, gas wheat, gold, palladium, nickel, and steel — despite now having fallen to more reasonable levels.
Now the investment case is changing. Most importantly, monetary policy worldwide (with the notable exception of Japan) is tightening significantly. The flood of money which has permeated the global markets over the past few years has now slowed to a trickle, and the implications for the best commodities could be substantial.
Accordingly, copper, gold, and lean hogs could be three excellent trading opportunities for Q4. However, volatility should be expected as the world enters recession going into 2023. And position traders should be prepared for initial losses given the instability.
Best commodities for Q4
For thousands of years, gold has been recognised as the ‘safe haven’ real asset inflationary hedge during times of severe economic stress, and 2023 may be no exception. Q3 2022 has seen central banks purchase a quarterly record 399 tons of gold, 160 tons more than the previous record of Q3 2018. Year-to-date, central banks have bought 673 tonnes, the highest amount in decades.
Of course, Spot Gold has spent the past seven months falling from its $2070 March peak, as traders turned to the US Dollar as a safer haven while the Federal Reserve raised interest rates. But with slightly more dovish tones now breaking out, gold could see the next bull run soon.
It’s worth noting that during the 2008 financial crisis, the S&P 500, widely touted as the benchmark for the US economy, fell by 37% while gold rose by 24%. However, at the time, the Reserve was enlarging its balance sheet through quantitative easing, increasing the supply of US Dollars, driving up gold’s relative value.
As it remains in a tightening phase, the precious recessionary gold runs are not a reliable indicator. But arguably, gold’s next bull run could be dictated by when the US Dollar tops out, and this will be dictated by when the Fed stops increasing rates, and pivots to stimulate the economy.
However, given the lessons from the Volcker years, rates will only start falling when CPI inflation returns to within the target range, perhaps by the end of 2023. Of course, gold bull runs typically start some months before the pivot begins, making timing the trade complex.
21 million metric tons of Copper are mined every single year. But this is not going to be enough to meet the growing demand. The ductile material is essentially irreplaceable in electrical products, including within EVs, phones, wind turbines, and solar panels.
Over the next two decades, the International Energy Agency expects copper to become a dominant mineral alongside graphite and nickel, with demand expected to triple by 2040. Codelco,
the world’s largest copper producer, concurs, arguing that there could be an eight-million tonne shortage by 2032.
Similar figures are cited by S&P Global which sees a deficit of 10 million tons by 2035, and Bloomberg Intelligence, which sees the shortage gap growing to 14 million tons by 2040.
For context, 2021’s shortage gap came to just 2% of global production but saw copper prices rise by 25%. The 2030s gap is predicted by multiple major analysts to be at least ten times as much.
Of course, this deficit is likely to drive copper prices higher over the longer term. The problem is that inflation has driven production costs up by as much as 30%, and legacy producers in South America are seeing even higher costs of production as their mines age and new projects become harder to explore.
Importantly, the cyclical nature of commodities means that copper’s price could fall in 2023 in accordance with the rising recession. This means operators could struggle to convince investors to spend on new mines, which take up to a decade to come online, rather than spend more on dividends and buybacks. For example, Newmont has already delayed a $2 billion final decision to expand its Yanacocha gold and copper mine in Peru.
But overall, copper could an excellent opportunity for position traders prepared to wait out any potential dip.
Lean Hogs is perhaps an unpopular commodity, especially compared to the hard commodities. However, there may be a case to go long, as producers struggling with inflation continue to put up prices to survive. Hogs has spiked twice recently, the first time to $117 in May 2021, and the second to $101 in March 2022. Now down to $80, it could be ready for the next run.
Feed and labour costs are rising exponentially for farmers, with some now turning to Lean Hog or Pork Cutout futures to manage their risk. Additionally, non-feed variable costs are up by 28% so far this year according to an Iowa State University cost of production report.
Some of the higher costs can be attributed to the fallout of the pandemic, such as supply chain issues and higher inflation inputs from feed and energy, but some factors pre-date coronavirus.
For example, Bureau of Labor statistics show that Q1 2022 employment on hog farms was down 5% year-over-year, while wages had by that point already risen by 11%. Younger workers can find less intensive work elsewhere in cities, migrant workers are down, and current workers are aging out of the industry.
Feed accounts for more than half of producer expenses, and grain costs remain elevated due to drought in the US corn fields, as well as the Ukraine War. Corn is down from its $8/bushel high earlier this year but remains at a decade-high.
Producers may turn to reducing their herds, which could see a return to the higher prices seen earlier this year.
* Based on revenue excluding FX (published financial statements, June 2020).