There are various reasons for asset markets trending higher after the novel coronavirus pandemic triggered correction. A key reason has been expansionary monetary policies and fiscal policy that supported and revived GDP growth. Easy money has also manifested itself in the form of inflation in various asset classes. As a broad asset class, commodities still remain undervalued.
Looking deeper, there are several commodities to invest in for potential out-performance in the foreseeable future.
This column will discuss three commodities that are worth considering for the medium to long-term. Before talking about the commodities, let me present an interesting data. In the last 10 years, non-gold commodities have been the only asset class that have delivered a negative annual average return. During this period, emerging market stocks, gold and U.S. stocks have been the best performers.
Therefore, besides exposure to specific commodity plays, it makes sense to remain invested in a commodity exchange-traded funds, or ETF. As an example, Invesco DB Commodity Index Tracking ETF (NYSEARCA:DBC) is attractive and has returned 32.7% in the last six months. The ETF provides exposure to a wide range of commodities (industrial and agricultural). It has an expense ratio of 0.88%, or $88 per $10,000 invested annually.
With this overview, let’s talk about three commodities to invest in.
- Gold
- Crude Oil
- Lithium
Commodities To Invest In: Gold
Among commodities to invest in, I would not hesitate in considering fresh exposure to gold. In August 2020, gold touched highs of over $2,000. The precious metal currently trades lower by 16% at $1,717. In the recent past, there has been a significant flow of money into Bitcoin (CCC:BTC-USD) and other crypto. This is one possible reason for a correction in gold.
However, gold is likely to remain in an uptrend. At current levels, the precious metal is worth considering. The biggest reason to be bullish on gold is expansionary monetary policies.
As central banks globally continue to flood the economic system with liquidity, inflation is a concern. To put things into perspective, the total assets in the Federal Reserve’s balance sheet has swelled from $4.2 trillion to nearly $7.6 trillion in the last one year.
The Fed has already signaled that near-zero interest rates will last through fiscal year 2023. I believe that the best part of the rally for gold is still to come.
From an investment perspective, it makes sense to consider some exposure to physical gold. Additionally, there are some attractive gold mining stocks worth considering.
I like Newmont Corporation (NYSE:NEM) from an asset and fundamental perspective. With $8.5 billion in liquidity, low debt and 94 million ounces of gold reserves, NEM stock is attractive at current levels. Among the relatively smaller names, Kirkland Lake Gold (NYSE:KL) is worth considering for the long-term.
Even after the recent correction, gold has delivered annual returns of 12.6% in the last five years. The precious metal can outperform in the coming years with expansionary monetary policy and inflation being the upside triggers.
Crude Oil
Crude oil is also among the commodities worth considering for the foreseeable future. Last year was one of the worst on record for the oil and gas industry. West Texas Intermediate crude slipped into negative territory in April 2020. Of course, that was a moment of extreme panic. Oil has gradually trended higher with hopes of economic expansion in the current year. For example, Brent oil is trading near $70 per barrel.
According to the International Monetary Fund, global GDP is likely to grow at 5.5% for the year and by 4.2% for FY2022. This is a key reason for oil trending higher. Additionally, as the global economy recovery and interest rates remain artificially low, commodity price inflation seems likely.
It’s also worth noting that OPEC and allies have decided against a big increase in output. This will keep the supply-demand scenario relatively tight. With these triggers, it’s likely that oil will sustain at higher levels. According to Goldman Sachs (NYSE:GS), oil is likely to trade around $70 to $75 per barrel.
In terms of exposure to oil stocks, I am bullish on Chevron Corporation (NYSE:CVX). The stock offers a healthy dividend yield of 4.71%. Further, Chevron has a quality balance sheet and is well positioned for aggressive growth if oil upside continues.
I also like Borr Drilling (NYSE:BORR) among the small-cap stocks. The offshore drilling company is well positioned for recovery in backlog and EBITDA margins as oil trends higher. With the recent capital raise, Borr Drilling also has a decent liquidity buffer.
Overall, renewable energy might have been in focus in the recent past. However, the crude oil bull story is far from over. With a sector rotation strategy, funds seem to be flowing into the commodity space. And crude oil stands to benefit.
Lithium
Lithium has found a place among the hot commodities in the last few years. A key reason has been strong growth for the electric vehicle industry.
According to S&P Global, lithium demand will more than double by FY2024 on EV growth. In FY2019, rechargeable batteries accounted for 54% of total lithium demand. It’s not surprising that lithium stocks have surged in the recent past.
In addition, research firm Roskill further opines that the demand for lithium is expected to remain strong through FY2030. During this period, the annual demand growth is likely at 19.7%. With potential for a decade long industry tailwind, lithium is among the top commodities to invest in for the coming years.
Among specific stocks, Piedmont Lithium (NASDAQ:PLL) is worth considering. After touching a high of $86.80, the PLL stock currently trades at $69.28. The company has a five-year sales agreement with Tesla (NASDAQ:TSLA) with the first shipment likely next year. The correction therefore provides a good accumulation opportunity.
Livent Corporation (NYSE:LTHM) is another stock to consider. The company recently signed an agreement with BMW Group to deliver both lithium hydroxide and carbonate. Volume deliveries are expected in the coming year, which will boost top-line and earnings growth. LTHM stock is attractive at current levels of $18.60.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored more than 1,500 stock-specific articles with a focus on the technology, energy and commodities sector.