March madness for markets, but commodities climb higher

Bloomberg

02-04-2025

The Bloomberg Commodity Total Return Index (BCOMTR) had its best quarterly return in three years and the individual sectors all contributed positively except for grains which fell by 1%. The biggest outperformances came from natural gas and precious metals as the gold price pierced the $3000 mark for the first time. We also saw softs perform strongly with coffee rising 23%, and industrial metals where copper prices rose on tariff news.
To start the year, the US had the highest seasonal amount of natural gas stored in 10 years as can be seen in Exhibit 2. The North American winter was expected to be mild but then January was unexpectedly the coldest month in the US going back to 1988. This created a spike in demand for natural gas used for heating buildings, leading to an increase in natural gas prices. Last year, there were record liquified natural gas (LNG) exports from the US as European and Asian buyers searched for alternatives to Russian gas. This also led to less domestic supply at a time when the weather shifted, and demand picked up. Storage levels have crept back to the middle of the 10-year range in March but are still below average at this point in the year. Another theme, which is only in its infancy, is the growing power needs from the tech sector. Despite the efficiency of new AI models like DeepSeek, the world will need more power as A.I. use increases in adoption and demand for energy sources like natural gas in turn will pick up as well.
Copper prices in NY hit an all-time high as the US announced tariffs on copper imports may come in the second quarter. Copper prices in London rose by much less and rose on a similar path to gold over the quarter, which doesn't typically happen historically (Exhibit 3). Daily correlations over the last year rose to 50% but correlations over the last 15 years have been almost perfectly zero. Tariff news, and the search for safe haven diversifiers, in the first quarter drove both metals higher despite their historically different demand drivers. Will gold lose momentum after a tremendous move higher over the last two years? Could Copper break out if what happened in the 2000s repeats? There was one period when Copper doubled in price from 2005 to 2008 during the last commodity super cycle and this could be a playbook to follow this decade as well.
With uncertainty for the markets ahead, this could be the year to diversify after a very strong 15-year period for US equities. Market participants are taking note, but so far positioning across commodities has been disparate with some sectors in favor over others. Exhibit 4 shows a clear bias toward market participants positioned for more upside in copper and gold while net short crude oil expecting lower prices from here. The last week of the quarter saw a reduction across net positions as traders lightened up exposure amidst the uncertain path forward for 2025. The precious metals sector, including silver, has strong tailwinds behind it but the energy sector is out of favor at the moment. This could switch on a dime if inflation picks up (the energy sector has the highest inflation beta of any commodity sector historically) or if there is an uptick in geopolitical tensions particularly in key oil producing regions.
Closing out the first quarter of 2025, we have already experienced a news-filled year despite only 60 trading days for the major commodities markets. At this point in the cycle, diversification is key, and the most recognized alternative asset class backed by the most history is commodities. Broad commodities have outperformed so far rising 9% as other asset classes are in free fall. Will this continue through 2025? During periods where risk assets move lower together in a correlated matter, turning to uncorrelated asset classes like commodities to diversify could be the right move if the March madness in markets continues the rest of the year.