Commodity Winners Under Trump

shutterstock_521630407

It’s no secret that commodities have been an outcast asset class for years now. The three year annualized return on the Dow Jones Commodity Index is -12.14% with investors steering clear of anything related to commodities like steel, aluminum, coal, and especially oil. The strength of the US dollar has acted as a further headwind for commodities, and with interest rates on the rise the dollar should remain strong.

The slowing Chinese economy left a demand vacuum in the commodities space with no other economies with strong enough demand to make up for it. While investors have been looking at possible alternative countries like India for a replacement, it seems that any real commodity revival will have to come from some other source.

But despite all the headwinds, some commodities could see gains next year. A new President means a new political administration and policies that could benefit certain sectors of the US economy over others.

For value investors, these commodities could be surprise winners for 2017:

Aluminum

Typically associated with a growing manufacturing base, aluminum has been a bit of a roller coaster for investors lately. But aluminum has been a stealthy gainer so far regardless of its volatility. With Trump in office though, aluminum could be a big winner for 2017.

Aluminum had been gaining before Trump was elected, but after, aluminum spiked even higher. Better than expected data from China has helped fuel the rally and an increased expected demand from the US means aluminum should have a prosperous road ahead.

Oil

Oil’s been a blight for the market for the past couple of years but the end is in sight. OPEC’s cartel looks to be permanently broken and oil is beginning to trade more along natural supply and demand curves rather than by political manipulations.

US shale oil was a major reason why OPEC panicked and began depressing prices in order to eliminate competition. But with Trump in office, investors can bank on policies aimed at US energy independence and that means keeping shale oil in production. Keeping oil flowing from domestic reserves will be a key point in the new administration.

Gold and Silver

The traditional safe haven assets have had a red letter year for 2016. Gold is up around 12% while silver has logged even more impressive gains north of 18%. Lately precious metals have fallen but the drop may be merely a correction.

Despite the rise in interest rates, a new administration mean increased volatility in the markets. Trump’s ideas regarding foreign policy could result in higher than expected inflation. That means assets like gold and silver could benefit.

Final thoughts

While some may argue that rising interest rates should curb any positive gains in commodity values, the truth is it may not impact them much at all. The small increases of a quarter of a percent on an annual basis won’t derail equity or commodity markets. However, China remains a key part of how commodities are viewed. Better than expected results tend to buoy commodity values, but China is still an economy in deceleration mode. Investors should bear in mind that time is ticking away until the global economy has a reason for improved commodity demand outside of China.