Investors always look for the best market conditions to make money and diversify their portfolios. In 2021, when prices hit record highs, the commodities market was a good place for investors to make money. The Global Commodities Index went up 36% in six months, showing that the market continued to do better than other investments in 2022.
But in July 2022, because of inflation, prices dropped by approximately 1% for energy, 9% for non-energy, 7% for agriculture, 13% for metals, and 6% for raw materials. So, investors are now worried about commodity trading and are moving their money elsewhere to keep their portfolios profitable.
What is happening with commodities?
Government initiatives have slowed headline inflation because higher interest rates have decreased demand. However, there are other factors at work that might perhaps trigger a new rise in commodity prices.
For example, the government is selling strategic oil reserves, causing oil prices to go down. This relieves pressure on energy prices, but the energy market hasn’t gotten any new capacity lately. So, energy prices will increase once the government stops selling from the strategic oil reserves. This means that inflation will keep rising, making commodity prices rise.
On the other hand, several large-scale factors are causing a temporary drop in commodity prices. But this is a standard commodity cycle and shows a slight decline in an otherwise good time for commodity investment.
Consider the example of crops grown for food. High grain prices are an excellent way for farmers to improve their irrigation and pest control to get the most out of their crops. But when crops are excellent, there are too many of them, and prices fall because demand stays the same.
The commodities market is volatile, and price changes are often caused by how people react to daily news. But the price drop is only temporary and is a normal part of the cycle of a commodity. Copper demand will increase again because of the steady push toward electric cars and new electric grids. Similarly, oil demand will go up because there is no additional capacity to meet the rising demand.
This proves the market is like a trampoline because it drops but returns to the surface level and sometimes goes high. So, even if the prices of commodities fall now, they will rise again in the future. History has shown that when commodity prices drop, they always come back up again.
A drop in commodity prices will accompany a commodity boom, so even though commodities are falling, investment experts suggest moving money from stocks and equities to commodities.