Investing in commodities has stolen the spotlight since the Fed cut interest rates to zero last March. Applying Elliott Waves to the Commodities Index allows us to showcase that they could continue to rise in 2021. However, we do need to weigh several components aside from Elliott Waves to make our forecasts. Therefore, inflation expectations will play a critical role as people move into commodities to hedge.
US oil under short-term risk
As the province of speculators, oil has already reached pre-covid levels in anticipation of the vaccine roll-out and of China’s re-opening.
With the US less likely to explore oil, higher crude prices benefit Saudi Arabia and Russia. Hence, they cut back their production.
However, vaccine uncertainty suggests short-term risk. From the autumn onwards, there might be more certainty over the vaccine program, and thus over oil prices. As crude goes up, it becomes more convenient to switch to natural gas, which would imply that the price of the latter will go up.
The economy is on an upward track, and the Fed has signaled that rising inflation is not a concern. So, for now, most commodities have no ceiling.
Gold eyes pre-Covid levels
Gold has already been ‘higher’ due to “cheap money”. And despite people piling into it, we’re still not back to pre-covid levels. The dip likely occurred due to demand for liquidity as banks ceased buying. This led investors into more volatile assets. However, it’s unlikely to impact gold holders.
Will silver outperform gold?
Silver seems to be more of a speculative play than gold due to its accessibility as a hedge. It might continue to outperform gold simply because of margin trading. But that would depend on demand for hedging against inflation.
Since the pandemic, silver traders have made a notable comeback, triggering an impressive supercycle correction that could continue well into 2021 and beyond.
Metals hang on demand for infrastructure
Copper is performing well as EV charging infrastructure is being rolled out. However, iron has depended on China’s support for infrastructure projects, so it could still be in high demand in 2021.
The world economy is not expected to do well in the long-term, though. And demand for infrastructure is likely to deteriorate, forming a ceiling for iron.
What to expect from the FED?
The economy is on an upward track, and the Fed has signaled that rising inflation is not a concern. So, for now, most commodities have no ceiling. Should the Fed acknowledge inflation, then interest rates will go up. How fast will determine gold and silver’s fall.
However, other commodities like copper, iron ore, coal, and energy would likely increase if the rise is gradual. If they fail to control inflation, we could see commodities go up in the short term and crash when the recession hits.
Therefore, as long as the Fed keeps a lid on spending and controls inflation, we might expect a new commodities supercycle, depending on above-average inflation and modest economic growth.
Stavros, Head of Investment Research at Orbex, is a certified investment professional that has been involved in the FX markets as a trader and analyst for nearly five years. He covers both fundamental and technical aspects of trading with a specialisation in core institutional trading strategies. An engineer by trade, his analytical mind allows him to identify the right opportunities at the right time.