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Commodities strengthen into midyear as demand for hard assets heat up
Commodities
Ole Hansen
Head of Commodity Strategy
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Key points:
The commodities sector is closing in on a strong first half of 2025, with the Bloomberg Commodity Total Return Index rising 3% over the past week and up 10% year-to-date—marking its highest level since September 2022. This rally significantly outpaces other US dollar-denominated assets, with both equities and bonds lagging behind. Unlike typical commodity bull runs driven by economic expansion, the current upswing is being fueled by safe-haven demand, geopolitical tension, and renewed investor appetite for hard assets amid macro uncertainty. The Invesco Bloomberg Commodity ETF is a UCITS compliant exchange-traded fund that seeks to deliver the return of Bloomberg Commodity Total Return Index.
Broad gains despite macro headwinds
The double-digit year-to-date return on the index, which comprises 24 major futures markets, split almost evenly between energy, metals, and agriculture, excluding platinum, the current star performer on 40%, has, as mentioned, been achieved despite heightened economic growth concerns, especially in the US and China, the world’s top consumers of raw materials. In the chaotic days that followed Trump’s “Liberation Day” tariff attack on major trading partners, the index suffered a top-to-bottom drawdown of 9% before embarking on a recovery that now has led to a fresh high being reached, and in the last week supported by gains across all three sectors, led by crude oil, fuel products, gold, silver, soybeans, and wheat. Note: besides platinum, the star performer, the bottom three are not included in the BCOM TR Index. In comparison, the S&P 500 trades up by less than 2% and the Nasdaq by around 3% after suffering significant February to April drawdowns of 19% and 23%, respectively. Highlighting the reasons why a diversified approach to commodity trading and investment reduces the overall volatility, making it easier from a risk management perspective to maintain an exposure through peaks and troughs.
Precious metal: Safe-haven star performers
Precious metals are leading the charge, with platinum, gold, and silver at the top of the performance table. Silver recently broke above USD 37 per ounce, its highest level in 13 years, while platinum is up more than 40% year-to-date after breaking a 17-year downtrend last month. Gold, which back in April hit a record high at USD 3,500, has moved into a consolidation phase while awaiting the next potential bullish trigger.
Despite the current lull, bullion continues to attract strong demand from central banks and long-term investors concerned about sovereign debt, inflation risks, and the weakening US dollar. Despite silver’s recent period of strength, the gold-silver ratio remains elevated near 91, well above its 5-year average closer to 80, highlighting silver’s relative catch-up potential if macro and technical tailwinds persist.
Growing concerns around US fiscal sustainability, softening labour market data, and the threat of tariff-driven supply disruptions are reinforcing the case for hard assets. These conditions also strengthen the possibility of a more dovish shift from the Federal Reserve, potentially opening the door to rate cuts sooner and deeper than previously expected. In this environment, gold pushing toward the USD 4,000 mark over the next 12 months is no longer out of the questions.Energy: Geopolitical risk premium returns
In the energy sector, prices have rebounded strongly this month, initially buoyed by seasonal summer demand tightening supply. This has helped offset bearish factors such as rising OPEC+ output and macroeconomic uncertainties. What began as a steady recovery—partly fueled by short-covering—turned volatile last week when Brent crude spiked as much as 13%, reaching USD 78.50 per barrel, after Israel launched a prolonged series of airstrikes on Iranian nuclear and ballistic missile facilities. Thereby reducing the chance of a negotiated solution between the US and Iran, which have centered almost exclusively on Iran’s rapidly advancing nuclear program, with the core objective of these talks to limit Iran’s nuclear activities—particularly uranium enrichment—in exchange for relief from US-imposed economic sanctions.
With Iran vowing to respond with missiles and drone attacks and rising fears of US involvement in strikes on Tehran and its underground nuclear facilities, the escalation has once again raised fears of broader conflict in a region responsible for a third of global oil output. Tensions around the Strait of Hormuz—through which over 20 million barrels of oil transit daily—are the main focus. Pricing a market that on balance—without a disruption—should trade closer to or below USD 70 is difficult, which is why the options market is increasingly being used by professionals to hedge the outside chance of a disruption spike, with the cost of buying calls now exceeding puts by a bigger margin than they did after Russia’s 2022 invasion of Ukraine.
Agriculture: Biofuel link, weather, and short covering offering support
Agricultural commodities continue to trade mixed, with a small 2.3% year-to-date gain in the Bloomberg Agriculture Index being primarily driven by strength across the livestock sector, while the index-heavy grain and soybean sector trades close to flat on the year. However, just in the past week, some strength has emerged with soybeans and corn catching a bid on the back of stronger energy prices, given the crop's role in the production of biofuels, while CBOT wheat touched a one-week high after a slow start to the US winter wheat harvest. Speculators—net short in wheat for three consecutive years—were forced to unwind positions, despite the broader grain complex still showing mixed performance year-to-date. Together with an extended short position in corn, traders of these two crops will look for signs of additional strength, forcing additional short covering from a technical and momentum-driven perspective.
Looking ahead: Risks to second-half momentum
Finally, it’s worth mentioning that while we see the commodity market being in the early stages of a multi-year super-cycle, several obstacles may prevent the sector from achieving a similar return in the second half. The energy sector may turn lower on a solution to the Middle East war, while the global economic impact of Trump’s tariff war, especially in the US, may have a dampening impact on the global economic outlook. Inadvertently, if materialise such weakness may drive down the dollar further while triggering a fresh round of US rate cuts, thereby supporting demand for hard assets through a reduction in the cost of holding a non-coupon or dividend-paying asset.
A new multi-year super-cycle in motion?
During periods of balanced demand and supply dynamics, commodities can go years without offering a return, but once a theme emerge they often evolve into so-called super-cycles:
- 1960’s to 1990’s: End of Bretton Woods and Oil Shocks (780% increase)
- 1990’s to 2020: Industrialisation of China and India (470% increase)
- Started in 2020, a potential new super-cycle driven by six Ds: decarbonisation, deglobalisation, defence spending, de-dollarisation, demographics and urbanisation as well as droughts/climate change.
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