The hallmark details on one kilogram silver bars are seen at London bullion dealers Gold Investments Ltd. in this arranged photograph in London, U.K., on Thursday, April 4, 2013.Simon Dawson/Bloomberg
Many long-time skeptics are starting 2017 with surprisingly rosy expectations for metal prices.
Consider Goldman Sachs Group Inc., which in November gave a thumbs-up to raw materials for the first time in four years. The investment bank sees an upswing in manufacturing around the world that will increase demand for many commodities.
"The recent reacceleration in global [purchasing manager indexes] suggests commodity markets are entering a cyclically stronger environment," wrote Goldman analysts, led by Jeff Currie.
Citigroup Inc., another persistent doubter, also turned bullish in early December. "Most commodities are ending 2016 in positive territory … with momentum continuing for even higher returns in 2017 and 2018," according to Edward Morse and his team of analysts.
The Citi forecasters argued that faster growth in the global economy should boost demand. Just as important, the huge wave of new production that drowned markets in gluts of many raw materials after 2011 may finally be ebbing, they said. Several years of falling prices have discouraged fresh projects and brought supply and demand back into sync.
"For commodities in general, the oversupply that was induced by high prices in the first decade of this century are finally being balanced," the Citi analysts wrote.
Here's the catch, though: While more gains may be in store for many raw materials, some metals face obvious threats.
Gold, for instance, could feel more pain if the U.S. Federal Reserve follows through on its plan to raise interest rates. Gold pays no dividend so it tends to suffer during times of rising real rates as higher yields draw investors to bonds and other income-producing investments.
Citi is also unimpressed by the prospects for coal and iron ore, both of which have soared this year. "Their out-performance in 2016 was a fluke and largely a result of domestic politics in China confronting market forces that remain inherently bearish," Mr. Morse said.
The wild card in all of this are the Chinese investors who are frenetically trading metals futures on exchanges in Dalian and Shanghai.
The casino-like speculation may swell in 2017, in large part because of the desire of many Chinese citizens to find stores of wealth other than the country's fading yuan.
Metals and other physical commodities are typically denominated in U.S. dollars so they offer convenient refuges for investors worried about the Chinese currency.
The massive inflows of Chinese money into industrial commodities are "an indication of the excesses of Chinese futures exchanges and the dangers that wanton trading on Chinese exchanges can destabilize global markets," according to Mr. Morse.
If fireworks do break out on China's exchanges, commodity prices may soar. Just don't count on the euphoria lasting.
Ian McGugan