However, June may start a summer of opportunity in three commodity themes that investors should investigate before they "go away."
One of the highest conviction themes we hear is that of the energy transition based on the size and scope of the theme. The size of the theme is enormous, given the economies involved. With a combined $52 trillion of gross domestic product2, the US, Europe, and China are trying to reduce fossil fuel dependence and switch to more renewable alternatives like wind, solar, hydroelectric power, and nuclear.
The scope of the theme is also significant. At a high level, Elon Musk said it best: if the US currently gets one-third of its energy from electricity, then the ultimate goal of the energy transition is to triple electricity generation.3
Similar transitions are underway globally in Europe and China. Environmentalists are helping raise awareness, but thoughts of energy security are just as important. There are a lot of instances of protectionism for supply chains in both fossil fuels and metals production that are key for renewable energy. Two recent examples of protectionism include US and European tariffs on Chinese electric vehicles (EVs).4,5
Where is the potential opportunity?
Copper is used heavily in wind turbines (4.7 tons per 3 megawatts (MW) installation)6, solar panels (5.5 tons per 1 MW installation), EVs (four times the copper of internal combustion engine (ICE) vehicles)5, as well as in electrical grid expansions and artificial intelligence (AI) data center needs. The data center component is not often discussed, but the world created 120 zettabytes7of data in 2023, 150 zettabytes in 2024, and may create 180 zettabytes in 2025 – a 20% plus growth rate.8 The average small-scale data center of 5,000–20,000 square feet consumes 1–5 MW, while large-scale data centers of 100,000 to several million square feet use 20–100 MW.8 For comparison, the average-sized nuclear power plant has a 1 MW capacity.9
Therefore, the potential opportunity exists between the one-sided bullish sentiment on artificial intelligence that we see in computer chips and corporate efficiencies and the very unsettled view the market has toward the power consumption requirements.
As evidence, copper sentiment among investors has swung wildly this year. In the four months between January 16 and May 14, the number of copper futures contracts owned by money managers rose from 44,634 to 141,000, representing a rise of 3.14 times.10 That dramatic change in sentiment took the market from nearly the 10-year low to almost the 10-year high in positioning in a short period.11 Quite obviously, the fundamental story for copper remained relatively the same. As of June 11, the number of contracts has fallen to 112,000, and copper prices have dropped to $9,536 a ton from $10,800 a ton.12
These rapid sentiment changes and the price increases they cause can be fickle beasts, and a pullback is both due and underway.
It is important to flag sentiment swings as causing noise around price discovery. The energy transition has created a longer-term secular demand growth story for industrial metals. In addition, many issues constrain industrial metal supply growth, which have been discussed in prior monthly outlooks. Industrial metals are also a way to gain exposure to Chinese economic growth without directly owning Chinese equities.
This summer's pullback in industrial metal prices may be an opportunity to gain exposure amid a secular uptrend.
The shift from El Niño to La Niña conditions
The water temperature in the Pacific Ocean creates consequences for global weather patterns.
La Niña13 occurs when the Pacific Ocean water temperature is more than 0.5° Celsius (C) below normal, creating wind patterns that tend to pull moisture off the land and out to sea as the warm air sinks over the ocean. El Niño14 is the reverse, with water temperature over 0.5°C above normal, creating winds that drive moist ocean air over the land, creating plentiful rainfall for crops.15
The shift to La Niña's dry conditions in 2020 was the basis of our positive outlook on agriculture in 2020 as it presaged expanded drought conditions and lower crop yields. The return of El Niño in 2023 was the basis for our negative outlook on the agricultural grain sector in 2023 as drought conditions abated and crop yields recovered. Agricultural grains may be worth investigating based on the possibility of droughts and lower crop yields over the next 12 months due to the potential onset of La Niña conditions.
Disruptive geopolitical weather system
Our January monthly outlook noted the risks around national elections this year in countries representing 42% of the global population and more than 40% of the worldwide GDP, an unusually high percentage.
During the Group of Seven (G7)16 meeting in mid-June, analysts noted the high disapproval ratings of leaders from the seven countries. Mr. Scholtz, Chancellor of Germany (-51%), Mr. Macron, President of France (-38%), Ms. Meloni, Prime Minister of Italy (-10%, also the most popular of the seven), Mr. Biden, President of the United States (-18.5%), Mr. Kishida, Prime Minister of Japan (-40%), and Mr. Sunak, Prime Minister of UK, (-54%).17 In the next 12 months, many of the G7 leaders and policies may change.
Challengers are gaining ground on incumbents due to the economic strife many feel due to the hefty price increases in everyday products since te pandemic. Although the rate of growth in these prices (inflation rate) has fallen from extreme levels, the absolute price level of most products has not returned to the levels seen in 2019.
The US CPI18 implies a 21% rise in living costs in the three and a half years since January 2020.19 That contributes to a perception that the economy is doing worse than the facts report. In a recent Harris survey20, 72% believed that inflation is increasing (CPI in May was 3.3%, down from 9.1% in June 2022), 56% believe the US economy is in a recession (real GDP grew at 2.5% as of 12/31/2023), 49% believe the S&P 50021 is down for the year (the S&P 500 Index is up 14% YTD), 49% believe unemployment is at a 50 year high (unemployment is 3.9% near a 50 year low).
The negativity is universal across political persuasion. Fully 67% of Republicans, 53% of Independents, and 49% of Democrats believe the US is in recession. Views on inflation do not differ much by party affiliation, with 80% of Republicans, 74% of Independents, and 61% of Democrats believing inflation is rising.20
Political challengers to the current G7 leaders can be grouped as largely populist, protectionist, and in favor of deglobalization policies. Many of their policies favor trade with allies over global sources (friendshoring), and this could result in higher commodity prices as less politically friendly commodity suppliers are ignored.
Many of these policies could be positive for precious metals and broad commodities. Should less environmentally friendly candidates win office, it would be a negative for EV use locally and positive for ICE auto sales as well as the platinum and palladium used in emission control devices for those vehicles.
Final thoughts
High levels of voter dissatisfaction worldwide have created polling surprises nearly weekly, and swift changes in commodity investor sentiment have swung from ten-year lows to highs within just a few months.
These conditions create opportunities in your portfolio for another look at commodity allocations.
2 Gross Domestic Product (GDP) is a monetary measure of the market value of all the final goods and services produced and rendered in a specific time period by a country or countries.
3 "PG&E, Elon Musk brainstorm ways to meet growing electricity needs." ABC7 News, July 2023. https://abc7news.com/pge-innovation-summit-2023-elon-musk-solar-energy-electric-vehicles.
4 "FACT SHEET: President Biden Takes Action to Protect American Workers and Businesses from China’s Unfair Trade Practices." The White House, May 2024. https://www.whitehouse.gov/briefing-room/statements-releases/2024/05/14/fact-sheet-president-biden-takes-action-to-protect-american-workers-and-businesses-from-chinas-unfair-trade-practices.
5 "Europe gives China a taste of its own trade medicine." Politico, June 2024. https://www.politico.eu/article/europe-give-china-taste-its-own-medicine.
6 "Renewables." Copper Development Association Inc. https://www.copper.org/environment/sustainable-energy/renewables.
7 A zettabyte equates to one sextillion bytes or one trillion gigabytes.
8 "Data Center Power: Fueling the Digital Revolution." Data Center Knowledge, March 2024. https://www.datacenterknowledge.com/energy-power-supply/data-center-power-fueling-the-digital-revolution.
9 "INFOGRAPHIC: How Much Power Does A Nuclear Reactor Produce?" Office of Nuclear Energy, March 2021. https://www.energy.gov/ne/articles/infographic-how-much-power-does-nuclear-reactor-produce.
10 Bloomberg data Comex Copper futures 1/16/2024 to 5/14/2024.
11 Bloomberg data Comex Copper futures 3/5/2011 to 6/11/2024.
12 Bloomberg data Copper cash price LME 6/11/2024 and 5/20/2024.
13 La Niña refers to the periodic cooling of ocean surface temperatures in the central and east-central equatorial Pacific Ocean.
14 El Niño is a global weather phenomenon that refers to the warming of the ocean surface, or above-average sea surface temperatures, in the central and eastern tropical Pacific Ocean.
15 "What are El Niño and La Niña?" National Ocean Service, August 2023. https://oceanservice.noaa.gov/facts/ninonina.html.
16 The Group of Seven (G7) is an intergovernmental political and economic forum consisting of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.
17 "Welcome to the most unpopular G7 summit ever." The Telegraph, June 2024. https://www.telegraph.co.uk/world-news/2024/06/13/welcome-to-the-most-unpopular-g7-summit-ever.
18 Consumer price index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas.
19 "Consumer Price Index for All Urban Consumers: All Items in U.S. City Average." FRED Economic Data, Federal Reserve Bank of St. Louis, May 2024. https://fred.stlouisfed.org/series/CPIAUCSL.
20 "A Majority of Americans Believe U.S. Is In Recession and Unemployment Is At 50-Year High. They’re Wrong." Politics PA, May 2024. https://www.politicspa.com/a-majority-of-americans-believe-u-s-is-in-recession-and-unemployment-is-at-50-year-high-theyre-wrong.
21 The S&P 500 is a stock market index tracking the stock performance of 500 of the largest companies listed on stock exchanges in the United States.
Important information
The statements and opinions expressed are those of the author and are as of the date of this report. All information is historical and not indicative of future results and subject to change. Reader should not assume that an investment in any securities and/or precious metals mentioned was or would be profitable in the future. This information is not a recommendation to buy or sell. Past performance does not guarantee future results.
Trading in commodities entails a substantial risk of loss and is not suitable for all investors.
Diversification does not eliminate the risk of experiencing investment losses.
Prospectuses for abrdn Physical Gold Shares ETF, abrdn Physical Palladium Shares ETF, abrdn Physical Platinum Shares ETF, abrdn Physical Precious Metals Basket Shares ETF and abrdn Physical Silver Shares ETF
Projections are offered as opinion and are not reflective of potential performance.
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ETF002206 3/30/25
AA-200624-179747-2