Best year for commodities since 2009
Good development despite precious metal weakness
Justin Wong (JW)May 9, 2025
Every year around this time we update our popular Periodic Table of Returns on Commodities. I invite you to compare the returns of 2021 with those of previous years.
Commodities, overall, had their best year in over a decade, in large part due to inflation sparked by unprecedented global monetary and fiscal stimulus. The Bloomberg Commodity Spot Index ended 2021 up 27%, its biggest jump since 2009, when the financial crisis similarly prompted governments and central banks to flood their economies with liquidity.
The top-performing raw material component was the energy sector: natural gas rose nearly 47%, crude oil rose 55% and coal from the Powder River Basin rose a whopping 160%. The energy sector grew twice as fast as the second strongest category, industrial metals. Aluminum led these materials with a 42% increase, followed by zinc (up 31%), nickel (26%), copper (26%) and lead (18%).
A difficult year for precious metals, gold severely undervalued As expected, precious metals were the worst performing category, down 8%. None of the components ended the year in positive territory. This also applies to gold, which performed the best with a loss of 3.6% despite the fact that inflation reached a decades-long high.
The collapse of platinum and palladium is easy to explain. As you may know, these two metals are used in the manufacture of environmentally friendly catalytic converters in automobiles. However, automakers were hampered by the global shortage of semiconductor chips, which slowed the production of new vehicles and hurt demand for platinum and palladium. Looking ahead, demand could decline even more if electric vehicles that don't require catalytic converters are on the rise.
The main headwinds holding the gold price back in 2021 was the belief that the US Federal Reserve would hike rates earlier than expected and reduce its holdings of assets to contain inflation. I've seen projections of up to four rate hikes in 2022, but I don't think the Fed will be as aggressive as risking the economy and the stock market crashing.
Still, investors avoided the yellow metal in 2021. According to the World Gold Council (WGC), gold-backed exchange-traded funds saw outflows of $ 9 billion, with much of that rotation in North American funds. This was the largest annual outflow since 2013. However, the WGC notes that, despite sales, holdings in exchange-traded gold funds were well above pre-pandemic levels as the funds saw record inflows of $ 49 billion in 2020.
Bloom, I think gold is severely undervalued right now, and as I told Investing News Network's Charlotte McLeod last week, the metal should actually be about $ 1,000 an ounce higher than it is now. The standard deviation of gold over the rolling 12 month period is approximately 20%. At today's prices, one standard deviation would bring the value of the metal to around $ 2,150, which would be a new all-time high.
I am not predicting this will happen. This is pure math and probability. However, we could face another difficult year as the Fed will tighten its monetary policy. This would strengthen the US dollar, which would weigh on the price of gold.
Comeback Kid: Fossil fuels rose sharply due to unexpectedly strong demand Let us return to the subject of energy. Last week, the Wall Street Journal had an interesting article penned by Bjorn Lomborg, author of False Alarm: How Panic Over Climate Change is costing us trillions, harming the poor, and putting the planet out of order. Lomborg believes that today's rising energy prices are "likely a sign of the future" thanks to the climate policies of the world's governments. In particular, he targets unreasonable decarbonization efforts:
"To limit the use of fossil fuels, you have to make them more expensive and push people to green alternatives that are more expensive and less efficient."
I am sure you have felt the pain at the pump over the past year and families in Europe continue to grapple with record-breaking energy prices.
You'd think that coal usage is declining rapidly, but believe it or not, coal-fired power hit an all-time high in the past year, fueled by the demand for cheap energy in China, India and other emerging economies. With production unable to keep pace with demand, this drove coal prices to record highs in 2021, making electricity - not to mention food and transportation - available to families in countries that have not yet completely phased out fossil fuels. is even less affordable.
Take Germany. In 2021, coal was the main source of electricity generation - a year in which wind power also fell to its lowest level since 2018. Yet the country now ruled by the Social Democrats, Free Democrats and Greens is well on its way to getting off coal by the end of this decade.
As a result of renewed demand for fossil fuels, stocks in oil and gas companies rose nearly 50% last year, outperforming renewable energy companies for the first time since 2016.
