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Commodities represent a key asset class in the financial markets. Characterised into two distinct groups: hard and soft commodities, they are the backbone of the global economy.
Both commodity types are common underlying assets for many tradeable derivative products, often called commodity underliers. Hard commodities denote raw materials that must be mined and extracted from the ground, including precious metals such as gold and silver, base metals (or industrial metals) like copper and iron, and energy commodities—think crude oil and natural gas. Soft commodities refer to goods grown or cultivated; familiar soft commodities are cocoa, wheat, sugar, corn and livestock.
Market participants will often seek commodities as a hedge against inflation (though the efficacy of this approach remains debated) and for portfolio diversification. This is where Exchange-Traded Funds (ETFs) can also help. A commodity ETF attempts to mirror the price movement of an underlying commodity or index, with funds either physically holding the underlying commodities or through derivatives: futures and options contracts. Interestingly, ETFs can also track commodity stocks. For example, an ETF may focus specifically on a basket of mining companies' stock prices.
Volatility in the commodities market tends to be higher than in stocks, bonds and currencies. You only have to look at the ATR (Average True Range) levels to see this. And, unlike the bond or stock market, commodities do not offer dividends (unless you trade commodity stocks) or yield.
2023 has been interesting for the commodity space thus far. Global economies are poised to slow and weigh on commodity prices in the face of slowing demand. However, it is important to observe that price decreases could be cushioned by tight supply.
So, where does this leave traders and investors in April?
Year to date (YTD), spot gold (XAU/USD) has rallied nearly 10.0%. Driven by several factors—including a weaker US dollar on the imminent pause of tightening (a pause in interest rate hikes from the US Federal Reserve), soft Treasury yields and safe-haven appeal—the price of gold is closing in on all-time highs of $2,075 per troy ounce. The trend is also unequivocally north, and price action recently breached the $2,000 barrier; therefore, technical trend traders (and breakout traders) will likely help underpin this market. However, according to Trading Economics Forecasts, the team anticipate a minor decline in the short term during Q2 to around $1,993, with a subsequent recovery to $2,018 in Q3 (Trading Economics, 2023).
In recent weeks, oil markets—both Brent and West Texas Intermediate (WTI)—gapped considerably higher following the OPEC+ (Organization of the Petroleum Exporting Countries) announcing production cuts. This move is said to take effect in May. This led the price of WTI oil to a high of $81.76 per barrel, with the market, at the time of writing, yet to fill the upside gap between $74.74 and $81.62. This upside surge comes after oil reached a low of $64.35 in late March, levels not seen since December 2021.
Oil prices have been lower since topping in March 2022 at $126.35, presenting a series of lower lows and lower highs: a downtrend. The recent gap higher, therefore, may be viewed as a sell-on-rally scenario, and traders may attempt to take advantage of price movement should oil begin penetrating the gap. On the other hand, the upside gap managed to breach the $80.65 6 March high, which could lead some to believe that this is a market potentially forming an early trend reversal to the upside.
As per the Trading Economics Forecasts, crude oil prices are expected to marginally dip to around $78.00 in Q2, yet heading into the year-end, prices are anticipated to rally to around $84.00 (Trading Economics, 2023).
Although now less expensive than gold and not as well known, palladium is a precious metal to be conscious of this month. Used in several applications, including electronics and jewellery, as well as car catalytic converters, supply and demand are the metal’s primary drivers.
Technically, palladium has traded lower versus the US dollar since early March of 2022 and, since the beginning of October, has formed a falling wedge pattern between $2,346 and $1,778. This is considered a reversal structure and exhibits decreased momentum. April has broken out above the upper boundary of the said falling wedge and is currently retesting the breached border. Could this be an early sign of an uptrend forming? Of course, at this point, it is too early to tell. However, should the market penetrate the $1,545 high formed on 14 March, this would be considered a higher high and confirmation of an early uptrend, according to the basic price structure.
The team at Trading Economics forecasts a continued decline for the precious metal to reach as far south as $1,256 in 2023 (Trading Economics, 2023).
There is no denying that an unmistakable downtrend for the price of wheat (against the US dollar) has been seen since a peak formed at $1,328 in early 2022. While a long-term decline in the dollar could eventually help bolster wheat prices, the ongoing bearish sentiment is supported by chart studies, suggesting a fresh lower low might be around the corner. This would reaffirm the current downtrend and reach levels not seen since July 2021.
With this being said, April could see a breakout below 22 March low at $645, action encouraging breakout sellers and trend traders, and aligning with the forecast out of Trading Economics, who anticipate a drop to $630 by the year-end (Trading Economics, 2023).
Trading Economics estimates corn is expected to slightly increase in April and Q2. However, as the market heads into the year’s second half, sellers are anticipated to prevail and reach $618 (Trading Economics, 2023). From a technical standpoint, nevertheless, the charts have seen a moderately bearish bias since September 2022.
The chart shows that price action formed a lower high in early April and has since printed lower prices. As per the technical picture, the chart offers limited support until between $606 and $622, which aligns with the downside target set by Trading Economics (above). Consequently, sellers appear in control for the time being, and the $618 target could be reached sooner than projected by Trading Economics, according to technical studies.
Charts: Daily Timeframe (Trading View)
Economics, T., 202. Trading Economics. [Online].
Trading Economics, 2023. Trading Economics. [Online]
Available at: https://tradingeconomics.com/forecast/commodity
[Accessed 05 April 2023].
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