As we progress through 2024, the commodities market is emerging as a key area of interest for investors seeking to diversify their portfolios and hedge against inflation.
With insights from Kar Yong Ang, a financial analyst at Octa broker, we explore the most promising commodities of the year, including gold, oil, lithium, and others, and provide strategies for traders to navigate these opportunities effectively.
Understanding Commodities
Commodities, ranging from precious metals to energy resources and agricultural products, are the raw materials that power the global economy. Unlike financial assets, their value is largely determined by supply and demand dynamics.
"In 2024, commodities are playing an essential role in portfolios, particularly as a hedge against inflation and currency devaluation", explains Octa analyst Kar Yong Ang.
This fundamental difference makes commodities a vital tool for diversification, especially during periods of market volatility. Besides, they are seen as more predictable. Considering these two factors, commodities can help you minimize financial risks.
Top Performing Commodities of 2024
Gold continues to stand out as a safe-haven asset, especially amid global uncertainties. The financial turmoil in August 2024 and ongoing geopolitical tensions have significantly increased demand for gold.
"The reduction in import duties by key markets like India has further boosted retail demand, reinforcing gold's position as a top-performing commodity this year", notes Kar Yong Ang.
Central banks have also been major buyers, with a net purchase of 228 tonnes of gold in Q1 2024 alone, marking a 34% increase compared to the same period in 2023. This surge has driven prices to record highs.
Traders should monitor inflation rates, interest rates and the strength of the American dollar. Since gold is traded in dollars, its price is inversely related to the USD exchange rate.
When the dollar weakens, gold becomes cheaper for holders of other currencies, stimulating demand and increasing its price. The same happens if the Federal Reserve (Fed) cuts interest rates, which is the expected scenario according to the current market sentiment. Here’s how lower interest rates affect gold:
- Reduce the attractiveness of competing investments like bonds, making gold a more appealing safe-haven alternative
- May stimulate economic growth, often leading to higher inflation; since gold is historically perceived as a hedge against inflation, its price tends to rise as investors heavily invest in it to protect themselves
- Might signal economic weakness or uncertainty, which could boost gold's appeal as a safe-haven investment.
Despite recent price drops, oil remains a crucial commodity due to its integral role in the global economy.
"Geopolitical tensions and OPEC+ production decisions heavily influence the 2024 oil market", says the expert.
The economic slowdown in major economies like China and the U.S. has tempered demand, with global oil demand expected to grow by just 1.2 million barrels per day (mb/d) in 2024, down from a previous forecast of 2.4 mb/d.
However, oil remains a vital energy source, and the coming months could see significant price fluctuations, especially if geopolitical tensions escalate or supply disruptions occur.
Traders should stay alert to changes in crude oil and petroleum inventory levels in key oil-consuming countries and monitor supply dynamics in major oil-producing countries.
Exotic Commodities to Watch
Besides major commodities, traders can consider less conventional ones like cobalt, lithium, nickel, graphite, hydrogen, carbon credits, or rare earth elements (REE). They are boosted due to global technological changes and a global green agenda. Here’s a breakdown of three emerging commodities to watch:
1. Lithium: Its importance is growing rapidly as the world shifts towards green energy, particularly in the production of electric vehicle (EV) batteries. The global EV market is projected to grow significantly, with EV sales expected to increase by 35% in 2024, driving up the demand for lithium.
This makes lithium an interesting alternative for traders, especially as countries continue to invest heavily in renewable energy infrastructure and aim to scale up EV production.
The ongoing advancements in battery technology, including the push towards higher energy density and longer battery life, further underscore the importance of lithium in the coming years.
However, it's important to note that the futures market for lithium is not sufficiently liquid, making it challenging for traders to gain direct exposure. Most traders can access the lithium market through investments in lithium-producing company stocks or exchange-traded funds (ETFs) focused on this sector.
2. Nickel: It is another commodity to watch, primarily due to its essential role in high-energy-density batteries. However, recent fluctuations in nickel prices, which saw a drop of nearly 15% due to increased supply from key producers, highlight the market's volatility.
Traders should be cautious of supply constraints and geopolitical risks, particularly as these factors could further impact nickel prices. Monitoring technological advancements in battery production and developments in global supply chains will be crucial, as these elements are likely to shape the future demand for nickel.
It's important to note that the futures market for nickel is not highly liquid, meaning that most traders seeking exposure to this commodity may need to do so through investments in nickel-producing company stocks or exchange-traded funds (ETFs) that focus on the sector.
3. Hydrogen: It is increasingly seen as a cornerstone of the clean energy transition. Governments worldwide are investing heavily in hydrogen infrastructure, positioning it as a key energy carrier for the future.
In 2023 alone, global direct investments in hydrogen-related projects reached nearly $16 billion, reflecting a significant commitment to developing this sector.
Furthermore, the International Renewable Energy Agency (IRENA) projects that hydrogen could meet up to 12% of global energy demand by 2050, underscoring its potential as a transformative force in the energy market.
However, it's important to note that hydrogen is not a traded commodity in the classical sense. There are currently no operational market or futures contracts for hydrogen, making it challenging for traders to gain direct exposure.
As the sector evolves, traders will need to explore alternative methods, such as investing in companies involved in hydrogen production and infrastructure, to capitalise on this emerging market.
Conclusion
The commodities market in 2024 will be a critical space for investors looking to navigate the challenges of a volatile global economy. To succeed in this dynamic market, traders need to stay informed about global economic trends, geopolitical developments, and the shifting demand for these vital resources.
Moreover, they should practice risk management to protect their funds, especially in times of volatility. To safeguard themselves, traders need to keep learning.
To avoid getting distracted, it’s best to access educational sources at a trading platform like Octa, which offers free learning materials, a user-centric trading experience, and the five most popular commodities to trade, including gold and oil.
This facilitates improved concentration, hence increasing the chances of successful trades.