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Myra P. Saefong

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Dec. 18, 2021, 3:00 p.m. EST

Why 2022 will be a ‘more challenging’ year for commodities such as oil and gold

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By Myra P. Saefong

Some analysts warn that 2022 will be a difficult year for commodities, with the economic impact of the pandemic likely to result in more volatility after this year’s rally in energy prices fed inflation but also prompted expectations of higher interest rates that pressured metals metals.

“It will be a more challenging year for commodities in 2022 because global central banks are tightening policy,” says Noel Dixon, global macro strategist for State Street.

“Central banks reacting to supply-driven inflation,” which they cannot control, is “likely to result in a policy mistake that will adversely impact demand,” he says.

Overall, commodities performed well this year. The S&P GSCI /zigman2/quotes/210598561/delayed XX:SPGSCI -1.11% , a commodity index composed of 24 exchange-traded futures contracts across five physical commodities sectors, is up more than 32% as of Dec. 14, on track for its largest yearly percentage rise in 12 years.

Commodities “once again proved their value” this year, and demand “appears to be growing for almost all commodity markets, while supply is structurally constrained across the board,” says Hakan Kaya, senior portfolio manager at Neuberger Berman.

Leading the rise, the S&P GSCI Energy index /quotes/zigman/210598574/realtime XX:SPGSEN +3.12% has gained 48%. S&P GSCI subindexes for industrial metals /quotes/zigman/210598575/realtime XX:SPGSIN -1.71% , agriculture /zigman2/quotes/210598559/delayed XX:SPGSAG -0.28% , and livestock /quotes/zigman/210598571/realtime XX:SPGSLV +1.13% have also climbed.

In general for the commodities that saw the biggest gains this year, low inventories and reduced capital expenditures led to concerns as to whether supply will be “adequate to match resurgent demand,” says Eliot Geller, partner at CoreCommodity Management.

This led to higher prices and many of the “favorable factors” that contributed to the rally “such as inflation, supply-constrained physical markets, commodity-intensive infrastructure spending, rising production costs, and the ongoing transition to a lower carbon economy are expected to persist, and in some cases, accelerate in 2022,” he says.

Precious metals decline

Still, the S&P GSCI Precious Metals XX:SPGSPM -0.59% index is down nearly 7%, defying the upward trend among the other S&P GSCI subindexes this year.

“As global central banks have begun to tighten, it has caused gold to underperform as real yields have increased,” says Dixon. As of Dec. 14, gold futures /zigman2/quotes/210034565/delayed GC00 -0.12% traded more than 6% lower this year, while silver /zigman2/quotes/210315219/delayed SI00 +0.07% has lost 17%.

Read The tale of two metals: why copper and silver have taken split paths this year

Gold’s performance in 2022 will depend largely on how the omicron variant affects the global economy and trade, says Geetesh Bhardwaj, director of research at SummerHaven Investment Management. “With inflation remaining stickier than the Fed had hoped, any loss of confidence in growth prospects could be very bullish for gold.” 

On Dec. 15, the U.S. Federal Reserve said it would phase out its bond-buying stimulus program sooner than previously planned, and suggested three interest-rate hikes next year as it moves to fight high inflation.

Meanwhile, Taylor McKenna, analyst at Kopernik Global Investors, points out that gold’s decline this year comes despite the highest inflation in decades, and the market has not seen major new gold mines being built for many years. Even though commodities, with the exception of precious metals, have been performing well, mining companies are “still shunned by the market,” he says.

Gold is among the commodities trading below “where the long-run fundamentals suggest they should trade,” says McKenna, adding that Kopernik estimates gold’s “fair” price at around $2,000. “We see upside if gold stays at current prices and tremendous upside should gold increase” to our fair price estimates.

Also see: Platinum, palladium buck an overall upward trend for commodities, poised for hefty 2021 losses

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381.15
+11.52 +3.12%
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430.43
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340.18
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2,322.36
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$ 19.68
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Myra P. Saefong is on the markets team in San Francisco. She has covered the commodities sector for MarketWatch for more than 10 years. She has spent the...

Myra P. Saefong is on the markets team in San Francisco. She has covered the commodities sector for MarketWatch for more than 10 years. She has spent the bulk of her years at the company writing the daily Futures Movers and Metals Stocks columns and has been writing the weekly Commodities Corner column since 2005. Myra has been with MarketWatch since 1998 and holds a master’s degree in English literature.

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