• Just about everything went wrong for commodity investors last year; stronger dollar, higher US interest rates, falling EM currencies, trade wars and a widely predicted slowdown in global growth, especially in China the most ‘commodity hungry’ economy. The last man standing had been the oil price but that too took a bath in the last quarter.
  • If you stick to your guns long enough the market eventually makes you look smart, or at least in my case not quite so stupid. I’ve always maintained that Brent would trade in a US$40/bl to US$60/bl range governed at the lower end by the breakeven cost of US shale and OPEC’s desire for higher prices and at the upper end by a rapid increase in shale productivity and capacity. This proved wide of the mark last year as an OPEC/Russia production agreement and bottlenecks constraining US shale supply send the price rocketing through US$80/bl by the summer. Finally though I have been able to wipe a bit of egg of my face as US sanctions on Iran were less stringent than feared, the shale boys got gushing again with the US now a net exporter of oil for the first time in 75 years, and financial markets suddenly began pricing in much lower global growth in 2019, all of which sent Brent tumbling back to US$53/bl. Oil remains the most emotional of markets.
  • As a classic safe haven, Gold benefited from the equity market carnage in the quarter and rallied from US$1200/oz to US$1280/oz by year end. This still marks a poor year for the yellow metal which had been trading around US$1350/oz at the beginning of 2018. A stronger dollar has been the main culprit; gold is priced in dollars so a stronger greenback makes it more expensive for holders in other currencies. Similarly, the higher interest rates in the US are negative for the yellow metal as Gold is an asset that pays no interest, behaving in effect as a zero-coupon perpetual index-linked bond. With US rates rising to a level higher than inflation then gold loses its lustre. Now though, maybe the game is changing; the increasing size of the US trade and budget deficits coupled with slower growth may stall the dollar whilst the US Federal Reserve are now signalling that interest rates are ‘close to neutral’ implying that the tightening cycle (and hence the rise in interest rate and bond yields) is nearly over. With equity markets in a lather and politicians losing any sense of responsibility, the Gold Bugs are sounding the charge (again!).
  • Mining company shares were amongst the weakest sectors last year, not surprisingly, and in the last quarter they were joined in their misery by the oil companies where shares prices fell in tandem with the sharp fall in the black stuff.

Summary: Oil has moved from bull to bear market in the blink of an eye and remains a very politically driven and emotional market. A more dovish US Fed and weaker dollar would help Gold but most commodities and mining shares will likely struggle in a slower growth environment.

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