Buoyant Base Metals Outlook Supportive of DBC 2022 Outlook

Soaring inflation, which is proving to be more persistent than originally expected, is supporting upside for an array of commodities and the related exchange traded funds this year.

The Invesco DB Commodity Index Tracking Fund (DBC) certainly merits a place in that conversation. DBC, which tracks the DBIQ Optimum Yield Diversified Commodity Index and is usually comprised of 14 actively traded commodities futures contracts, is up more than 37% year-to-date.

After a run like that, it’s not unreasonable for some investors to assume that 2022 upside for commodities and DBC is capped. However, the opposite could prove true if base metals continue rallying higher amid global economic strength.

“Incrementally stronger prospects for base metals and still-high iron ore, coal and gold prices will be supportive of the global mining sector’s performance in 2022,” notes Fitch Ratings. “Fitch’s neutral sector outlook balances prevailing economic growth expectations with risks from potential negative market sentiment, particularly due to liquidity concerns related to the Chinese property sector, which could affect commodity prices.”

Currently, the $2.58 billion DBC is heavily allocated to energy commodities with various oil and gas futures contracts combining for over 47% of the ETF’s weight.

Credit to DBC, because the fund is soaring this year even as gold, its largest metal exposure at north of 8%, surprisingly languishes even as inflation soars. That’s testament to the utility of DBC’s base metals exposure, which could benefit investors again in 2022.

“We expect copper inventories to remain historically low and transportation issues to persist in 2022, meaning that copper prices will be high but volatile. Energy-transition trends will support long-term copper demand,” adds Fitch.

Another base metal that could continue rising in 2022 is aluminum.

“We anticipate aluminium production curtailments caused by power shortages in China to extend into 2022. Furthermore, uncertain power availability discourages new investment in aluminium production capacity in China, leading to lower longer-term production and a very tight market balance,” says Fitch.

DBC currently allocates nearly 12% of its weight to aluminum and copper futures contracts, according to issuer data.

Other base metals featured in DBC include zinc and silver. That pair combine for about 7.3% of the DBC roster.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.