Best 4 commodities to invest in Q3

Commodities trading is becoming ever more popular in 2022. Four of the most popular include:

• Brent Crude
• Chicago Wheat
• Cotton
• Spot Gold

It began with the increased volatility associated with the pandemic tilt. Initially, global lockdowns saw demand for the best commodities to trade collapse. Then as the global economy reopened, demand recovered too quickly for producers to cope.

And exacerbated by Russia’s war with Ukraine, the price of oil, gas wheat, gold, palladium, nickel, steel and more have hit record or near-record highs in recent months.

But with these highs tapering off, picking the best commodities to invest in during Q3 2022 is becoming more complicated.

4 best investment commodities

1) Brent Crude

Brent Crude is widely recognised as the most popular global oil benchmark. At $100/barrel, Brent is now down $40 from prior highs earlier this year. But it’s still $30 higher than its 2021 average of $70, and leagues above its collapse to negative in mid-2020.

As the raw material for petrol, diesel, and plastic, oil is highly correlated with the global economy, as demand for oil falls and rises with consumer and business demand.

And as the global economy reaches a post-pandemic peak, demand could remain elevated for months to come, while simultaneously Russian oil has been cut off by the west. Moreover, while the exceptional profits of oil-producing companies such as BP and Shell can fall foul of windfall taxes, the same does not apply to this globally traded commodity.

Brent’s price is also affected by the supply side economics. For example, if Russia chooses to completely cut off gas to Europe this winter, the oil price could rise even further. And OPEC+, responsible for 40% of global output, has agreed to only add 100,000 barrels per day to the market from September. This is a much slower pace than in recent months, and according to Eurasia Group’s Raad Alkadiri, ‘so little as to be meaningless…as a political gesture it is almost insulting.’

The key risk for Brent is the heightened likelihood of demand destruction as the world edges closer to a global recession.

2) Chicago Wheat

While surging oil and gas prices have the potential to create a severe recession, especially within the Eurozone, the impact of rising wheat prices as a result of the Ukraine war is arguably just as important.

Russia and Ukraine together account for a third of all global wheat exports; the commodity is so important to Ukraine thwat its national flag of yellow and blue signifies the sky over a field of wheat. The so-called ‘bread-basket of the world’ has essentially stopped exporting, causing Chicago Wheat to spike amid fears of possible famine in LEDCs.

While the warring countries have agreed a deal to allow Ukraine’s wheat out of blockaded Black Sea ports, there is no guarantee this will come to fruition. In addition, supplies have been hit by drought in Europe and North America, while second-largest exporter India has controversially banned most exports after record temperatures saw yields fall.

Accordingly, Chicago Wheat was at a stable $500 a bushel in mid-2020, before rising to a record near $1,300 a bushel in May 2022. But despite having fallen to around $800, demand for wheat is predicted to rise in the long term given its ease of growth, diverse use both as a key food source for humans and as animal feed, and its role in the production of meat, milk, and eggs.

There is a risk that high prices will see demand for alternatives, such as corn, rise. Of course, as food demand is inelastic, alternatives could easily rise to wheat’s high rather than cause it to fall.

3) Cotton

An often-overlooked commodity, cotton prices hit their highest level in more than a decade in May, trading at over $150 per pound, a threefold increase from its $50 pandemic-era low. Cotton is an essential raw material in the manufacturer of multiple textiles, including many types of clothing.

Like wheat and oil, there is a significant imbalance between demand and available supply. To start with, the pandemic shut down much of the cotton industry. With demand returning, remaining operators are still gearing up manufacturing capacity.

More importantly, the US has banned cotton imports from Xinjiang province in China after widespread outcry over the possible use of forced Uyghur labour. The issue is particularly sensitive given America’s chequered history with cotton. Further, the ban is unlikely to be lifted, especially as relations between the two powers deteriorate.

In addition, climate change-induced heatwaves and drought have seen the yield of cotton crops in the US, which still remains the world’s largest exporter, fall significantly. In India, another important exporter, the same issues affecting wheat affect cotton; low rainfall, extreme heat, and increased agricultural pests.

While demand could be constrained by the global slowdown, the lack of alternatives and supply-side issues means cotton could continue to stay elevated.

4) Spot Gold

In this new world of rising inflation, gold remains the traditional real asset inflation hedge, preserving purchasing power and acting as a protective asset for investors, many of whom are coping with severe market stress for the first time.

With CPI inflation at 9.4% in the UK, 9.1% in the US, and a similar story across the developed world, the near record gold price offers an attractive place for investors to park money until market volatility subsides.

A Reuters poll of 35 analysts on 3 August says gold will average $1,745 an ounce in 2023, just shy of current prices, due to increasing interest rates and the strength of the US dollar. Already at $1,770, spot gold has fallen from a record $2,070 in March as investors choose between the safety of dollars over gold.

However, if the global slowdown accelerates into a full-blown recession, demand for gold will heighten as investors move money out of equities. This could translate into a recovery closer to its May high.

And with inflation potentially soaring higher, the hedge could become even more attractive.

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* Based on revenue excluding FX (published financial statements, June 2020).