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Bars of palladium, a precious metal.Getty Images/iStockphoto

At first glance, commodities trading should be relatively straightforward and more predicable than ever. Advances in communications, forecasting and information gathering should mean fewer surprises when it comes to crop yields, oil and gas production or mining output, and the spot prices for foods, energy and materials, all of which are vital components to civilization as we know it.

Yet fortunes are won and lost nearly every day in commodities trading because of unforeseen or low-probability events that create shortages, surpluses or investor panics.

It is one thing to know China's demand for copper over the past five years, but who knows whether the world's second biggest economy is going to have a "hard" or "soft" economic landing this year? How will the Euro zone's sovereign debt crisis play out and will Greece be dealt with in a euro-preserving manner or serve as the first domino to fall? And what of the Persian Gulf showdown between Iran and the United States?

Traders have swung between optimism and pessimism on this trio of macro issues that could act as a major brake on the global economy. Currently, the optimists appear to be in the majority.

"It is unlikely now that we are going to get an outright collapse of the financial system," says Bart Melek, the head of commodity strategy at TD Securities Inc. in Toronto. Last year, his group warned that the European debt crisis could shake investors' confidence and stampede them into ultra-safe investments such as cash and U.S. securities while dumping commodities and other "risky" holdings.

Confidence-building moves on the part of the European Central Bank, such as granting low-interest credit to European banks, have rebuilt confidence among the TD Securities' commodities team, which has pulled back its red alert warning. "We no longer worry to the same extent as we did before that there is going to be this massive collapse where these banks won't be able to access cash."

TD's Mr. Melek, whom Bloomberg Rankings identified as the most accurate forecaster tracked in the past eight quarters, is also seeing new signs of economic recovery in the form of manufacturing data from China, India and the U.S.

While the critical demand side of the equation looks to be strengthening for commodities, monetary policy, particularly from the U.S. Federal Reserve, is intended to ensure that the slow recovery continues. On Feb. 2, Fed chairman Ben Bernanke stated the Fed would do whatever necessary to keep the recovery alive – measures that include continuing ultra-low interest rates and, unstated but expected by most observers, another round of quantitative easing.

Mr. Melek's commodity focus today is on the key automotive inputs of platinum and palladium, as well as copper, which all could be facing supply shortages in 2012-2013. He is cautionary about silver – "it is something that can turn on a dime" – and bullish regarding gold bullion, with a forecast for the yellow metal to rise to more than $2,100 (U.S.) an ounce by year end.

Underpinning the rosier forecast for commodities is the prospect of reduced geopolitical risk in the Persian Gulf in the form of another round of international inspections of Iran's nuclear program and higher inventories of oil generally. "Oil might actually not move up an awful lot, which is very good for the rest of the commodities space," he says.

Earlier this week, the Bank of Nova Scotia reported in its commodity price index that sentiment has turned positive in the new year following overly bearish views in the fall of 2011.

"Late last year there was a lot of negativism in the market, and in some cases it was quite overdone, particularly for some of the base metals and especially in the case of copper," says Patricia Mohr, vice-president, economics, and commodity markets specialist with Scotiabank.

Copper is in a supply side deficit situation as international consumption exceeds refined production of the metal, she notes. "Late last year you had a lot of hedge funds, investment funds, shorting copper, shorting the base metals." In her report, she notes that those big funds have recently shifted from short to long positions in base metals, an indication that China is expected to have a soft landing in the form of slower growth.

This week China's purchasing manager index rose above 50, indicating expansion as the economy rides out Europe's sovereign debt crisis and a domestic property slowdown. "Their export orders are down in China, but their domestic demand is up and, of course, that is what we are all looking for," says Ms. Mohr.

Geographically, her commodity focus centres on China, followed by the U.S. and Europe. "China of course is the 800-pound gorilla these days in just about all the raw material markets," except crude oil.

China's influence can perhaps be best illustrated by looking at copper consumption. Last year, the Asian giant accounted for nearly 39 per cent of the world's refined copper consumption, compared with 9 per cent for the U.S. and 15 per cent for the countries of Western Europe. "[China]is more important than the general public realizes because, of course, China has very large investments in the resource industries across Canada."

Ms. Mohr expects crude oil prices to rise in 2012 and is not forecasting a recession for the U.S. She also predicts GDP growth for China of 8.6 per cent in 2012, up from 9.2 per cent growth last year. She is also bullish on the price prospects for gold bullion, given the U.S. Fed's simulative policies.

"My picks would be copper, gold, oil [producer]stocks," she concludes.