Updated on January 21, 2023
If you’re new to the investment world, you might have confused some investment jargon with mainstream catchphrases; for instance, you might have wondered what is a hot commodity and whether it means the same in and outside the investment world. The short answer is yes, and no. In contrast, mainstream speak uses ‘hot commodity’ to mean cars, clothes, houses, and even people that are much loved and admired. In the investment world, the term is used to indicate commodities that are in great demand by investors.
What are commodities?
Commodities are a class of assets that possess uniform quality and are produced in large qualities by many different producers. Commodities include cotton, oil, wheat, oranges, lithium, gold, and others. Most commodities are extracted or harvested from the earth and are basically utilised by large manufacturing companies to create end products.
Despite market movements in the global economy, commodity needs at a worldwide level continue to exert pressure on commodity markets. The Russian invasion of Ukraine, the post-pandemic slowdown, and China’s zero-covid policy have all dealt heavy blows to the supply of certain commodities, inevitably leading to increased demand.
In fact, by all indications, the world is already heading toward an economic slowdown. The US Federal Reserve, the European Central Bank, and the Bank of England are already using higher interest rates to curb demand. All the aforementioned economies are heading for a recession, signalling higher price pressure in 2023.
Consequently, the Bloomberg Commodity Index has dropped roughly 20% from its June peak. However, the basket, which keeps track of the price of over two dozen raw materials, climbed higher than its peak in 2008 and 2011.
With all the talk about the real potential of a recession on Wall Street, investors high and low will be looking for investments to park their money and wait out the storm. This makes commodities increasingly attractive, especially because commodities historically outperform stocks and bonds in times of market volatility.
In addition, commodities offer investors the opportunity to spread their risk portfolio. Here are some hot commodities to watch in 2023.
As one of the oldest and most valued commodities, gold remains an essential commodity in the financial world. With its broad uses, such as jewelry, currency, and a store of value, this commodity ranks highly among investors. Gold is highly liquid, and investors can buy gold in the form of gold coins, bullion, jewelry, ETFs, and stocks in gold mining companies.
This commodity enjoys high demand due to wide need and application across the entire globe. Products of crude oil include petrol, diesel, and other petrochemical products. Despite the fact that the move to cleaner energy has gained momentum, this form of energy maintains a high demand because of its many different applications.
Global supplies affect the price of oil and the Organisation of Petroleum Exporting Companies (OPEC) dominates the marketplace. Roughly 40% of global oil supplies come from OPEC, and this organisation sets production quotas for member countries.
During the covid-19 lockdowns, oil prices plummeted due to the decline in demand. However, the market has since rebounded, with the price of Brent crude increasing to its current price of roughly $82.
Economists expect the price to increase to $125 per barrel in 2023, owing to various macroeconomic factors.
This is another hot commodity for 2023. Aluminium is a lightweight metal that has many uses in different industries, such as automobiles, construction, and electronics. On the global scene, China is both the largest producer and consumer of this metal. The price of this commodity is primarily affected by demand but also by the oil and electricity prices in a country.
Wall Street analysts expect this commodity to perform well over the course of this year. Copper enjoys wide application in industries that manufacture utensils, electrical wiring, and machinery. Investors recognise the opportunity inherent in this commodity because its products are applied in other booming manufacturing industries.
Lithium and Cobalt
According to the Australian Government’s commodity forecaster, the Office of the Chief Economist (OCE), global demand for lithium is expected to increase by roughly 40% over the next two years. The OCE predicts an increase from 745,000 tonnes in 2022 to approximately 1,091,000 by 2024.
The ostensible drive for the high demand for lithium is its unique application in electric vehicles. As seen in recent times, these are steadily gaining mainstream attention. In addition to this, cobalt is used in lithium-ion batteries. It is also used to make electronic appliances such as cell phones, tablets, laptops, and E-bikes.
The supply chain issues resulting from Russia’s invasion of Ukraine caused a spike in global natural gas prices. Gazprom, a Russian-owned company, is the worldwide leader in natural gas production, with an astounding 40% stake in Europe’s supply.
In early 2022, Russia slashed supply to Gazprom subsidiaries as a response to NATO sanctions placed on the country. It also made a 75% capacity reduction to the Nord Stream pipeline. This sent gas prices in a spiral, especially as the EU was preparing for the increased winter demand.
All this, coupled with the high temperatures in US and Europe, has also driven demand higher. This could spell profits for investors in the short run as the Russian-Ukraine crisis continues.
In May 2022, Cotton prices hit their highest level, reaching roughly over $150 per pound. This was nearly triple the pandemic price and signalled a recovery in the industry. As global manufacturing continues to stabilise, demand for textiles will increase. This will obviously positively impact the demand for cotton. However, due to the current economic fringe war between the US and China, cotton prices will likely climb higher than expected since the US banned imports from China. With increasing demand and a strained supply, cotton looks like a hot commodity in 2023.
Hot commodities are commodities that enjoy high demand from investors. The demand could be driven by anything ranging from a war between major suppliers, supply constraints, increased demand after a global catastrophe, and so much more. The future looks bright for commodities such as gold, crude oil, lithium, natural gas, and cotton. Now might be the perfect time to invest. However, before you invest, remember to conduct your own research.
What are the hot commodities to watch in 2023?
In 2023, hot commodities to watch are gold, crude oil, aluminium, copper, lithium and cobalt, natural gas and cotton. These commodities are experiencing high demand due to various macroeconomic factors such as the Russian invasion of Ukraine, the post-pandemic slowdown and China’s zero-covid policy. Additionally, commodities offer investors the opportunity to spread their risk portfolio and have historically outperformed stocks and bonds in times of market volatility. Investors should conduct their own research before investing in commodities.
What factors influence the price of commodities?
Factors that influence the price of commodities include global supplies, demand, macroeconomic factors, production quotas, and geopolitical tensions. For example, the Russian invasion of Ukraine caused a spike in global natural gas prices, while the US-China trade war caused cotton prices to climb higher than expected due to a strain in the supply. In addition, the Organisation of Petroleum Exporting Companies (OPEC) sets production quotas for member countries, and the US Federal Reserve, the European Central Bank, and the Bank of England use higher interest rates to curb demand. Finally, commodities offer investors the opportunity to spread their risk portfolio, and historically commodities outperform stocks and bonds in times of market volatility.
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