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As the world debates whether or not global growth is slowing down, this puts a particularly harsh spotlight on commodities as an asset class. Supply chains being disrupted on and off since the pandemic and have played havoc with raw materials and their pricing, so it should be noted that May could very well be much more active than is typical according to past performance, as the stock market, the commodity market, and Wall Street all typically focus more on vacation under normal circumstances.
With that in mind, there are other factors at play, not the least of which would be the Fed and a slew of recent hikes to interest rates, as well as concerns about real estate pricing in various parts of the United States, Canada, and several countries in Western Europe. The Federal Reserve continues to aggressively sell off its debt holdings, which is a backdoor way of saying “quantitative tightening.” While interest rates in America may have peaked after the May 3 Fed meeting, several other central banks around the world continue to look very tight.
With that in mind, there are 5 commodities that may be worth looking into owning during the month of May, each with its own potential catalysts and potential concerns.
While the first quarter of the year has been an absolute disaster for natural gas, and May might not be a very strong month for natural gas due to forecasts of lower demand via warmer temperatures in the Northern Hemisphere, it is worth noting that as Russia no longer is providing energy for Europe since the war in Ukraine began, the reality is that as we get closer to the end of summertime in the north, natural gas will more likely than not start to pick up interest, as Europe will have to refill its tanks. May could very well be a “position-building month”, allowing traders to build a larger position with an eye on a larger total return. (Slow and steady would be key here.)
(Natural Gas – Daily Timeframe)
When it comes to diversification, gold is often among the first places people run to. Offering a bit of a shield from volatility, traders will buy gold for inflation hedging, and precious metals often work for wealth preservation. It’s difficult to think there won’t be a “buy on the dip” mentality when it comes to gold throughout the summer. There have been massive inflows into gold-related exchange-traded funds (ETFs), as it has been the best commodity to be involved in over the last several months. Furthermore, you may get even larger gains depending on which currencies you trade gold against. More of the same price action would be reasonably expected in May.
(XAU/USD – Daily Timeframe)
Crude oil will be a very interesting market as it has seen a lot of selling going back to last year and continues to look threatened. The global economy slowing down has hit the average oil fund quite drastically. Beyond that, WTI (US Oil) had completely fallen through a massive gap caused by OPEC suddenly and surprisingly cutting 1.6 million barrels of production per day starting May 1.
Derivatives traders have seen massive losses (which is also true with Brent crude) and profit margins from some of the largest oil producers in the world have seen a significant contraction. Oil prices continue to reflect a lack of demand in a slowing economy, and as it is one of the biggest components of the Bloomberg Commodity Index, it has also seen downward pressure.
That being said, eventually, crude oil gets bought into as commodity prices don’t stay low forever. In fact, there are two things that could lift crude oil in May: China reopening and the United States having to refill its Strategic Petroleum Reserve.
(WTI Oil – Daily Timeframe)
Silver continues to show signs of strength, not only through ETFs, but also through the futures markets. Keep in mind that silver is not only a precious metal, but it is used in a lot of renewable technologies, including the electric vehicle sector. It is probably one of the least known industrial metals, as it is more often than not used as “cheap gold.” That being said, the functionality of silver in multiple uses will continue to make silver a strong performer.
Ultimately, silver does have quite a bit more in the way of volatility in its day-to-day trading, so caution is most certainly going to be the most important aspect of trading silver. That said, it should continue to have a “buy on the dip” mentality, just as gold will.
(XAG/USD – Daily Timeframe)
The market for base metals could be a bit of a surprise, but many metrics will have to be watched closely. Without a doubt, the biggest driver of base metals demand will be China. If China continues to show signs of waking up, that could drastically influence copper, iron, steel, and aluminum.
Ultimately, this will come down to Chinese data more than anything else, which has shown signs of an attempt to turn around. Of particular interest will be Manufacturing PPI numbers, as they can give a bit of a “heads up” as to whether or not Chinese demand will pick up. If it does not, base metals could become one of the biggest shorts. Ultimately, the base metals markets will directly reflect global growth and the possibility of an economic recovery worldwide, as we have seen in the past that China can drag the rest of the global economy higher.
(Copper – Daily Timeframe)
(Charts: Trading View)
As a general statement, it’s more likely than not going to be a very volatile few months ahead. May will not differ, as the market and central banks are seemingly out of synch. While some central banks are starting to look more likely to “pause” interest rate hikes, the reality is that we may see a lot of demand destruction.
However, commodities are extremely bifurcated at the moment, and should remain so. The precious metals sector is the leader now, but if there is enough stimulus or economic growth, it could turn things around in favor of the energy sector. In this environment, it seems to be a “binary trade.”
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