The ongoing global economic growth and improving manufacturing activity have increased demand for raw materials, bolstering commodities markets and related ETFs.
Over the past three months, the PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC), the largest broad commodity-related ETF, rose 9.9% and the iShares S&P GSCI Commodity-Indexed Trust (NYSEARCA: GSG) gained 12.3%.
“Rarely has the outlook for a New Year been as encouraging as it is today,” Holger Schmieding, chief economist at Berenberg Bank, told Bloomberg.
One of the strongest indicators of the improving global economy is a rebound in manufacturing activity in Germany, whose economy is underpinned by well-known manufacturing brands like Volkswagen and Siemens, revealed that its unemployment rate fell to a record low in December.
Looking ahead, Wall Street banks including Goldman Sachs Group predict the global economy will expand 4% in 2018, its fastest pace since the post-recession bounce in 2011, which could translate to improved demand for commodities.
Meanwhile, demand for raw materials has risen as ultra-lax monetary policies bolstered economic activity and may even begin to fan inflationary pressures. We are already seeing prices rise, with Brent crude, the global benchmark, up to nearly $70 per barrel and palladium, a metal used to reduce harmful automobile emissions, hit an all-time high.
“The oil market is tightening, and it’s tightening very quickly,” Amrita Sen, chief oil analyst at consultants Energy Aspects Ltd., told Bloomberg “We see very strong demand, and it’s really broad based.”
The heightened oil prices has also translated to improved gains in broad commodity-based ETFs, such as DBC and GSG, since these diversified commodity investments include hefty energy allocations. For example, GSG holds 63.1% in energy and DBC includes 50.5% energy exposure.
“The price rises because of continued world growth and unexpected demand from developing markets,” Byron R. Wien, an executive at Blackstone Group LP, wrote in a note to investors.
Further supporting the commodities outlook, supply constraints, such as supply caps out of major global oil producers and wage negotiations at Chile’s copper mines, could support higher pricing.
For more information on the commodities market, visit our commodity ETFs category.