Cautious Optimism for Commodities in 2025

Navigating Headwinds and Outperformance

Commodity index returns remained relatively flat during the fourth quarter, as a stronger U.S. dollar and rising interest rates provided support, despite subdued demand for gold toward the quarter's end and heightened volatility in oil markets. The Federal Reserve's 25 basis point rate cut in December 2024 added complexity to the landscape, offering limited relief to commodities. Markets also reacted to the geopolitical and economic implications of Donald Trump’s election victory in early November. Meanwhile, China's slowing economy and underwhelming monetary and fiscal policy responses further weighed on global commodity demand, presenting a significant headwind for the sector.

The UBS Constant Maturity Commodity Index (CMCITR) returned -0.29% for the fourth quarter and +5.93% for the year, outperforming the Bloomberg Commodity Index (BCOM), which posted returns of -0.45% for the fourth quarter and +5.38% for the year. The CMCITR’s relative outperformance can be attributed to its lower exposure to the precious metals sector which faced headwinds during the quarter.

Sector Review: Energy Gains, Resilient Livestock, and Opportunities Amid Challenges

The energy sector rose approximately 5% in Q4, driven by a similar increase of around 5% in crude oil and crude product prices. Natural gas, however, remained relatively flat for the quarter. The long-term outlook for U.S. natural gas has improved following Trump’s election victory as anticipated deregulation and expanded U.S. LNG (liquid natural gas) export capacity are expected to bolster growth prospects for the domestic natural gas industry.

The livestock sector also rallied in the fourth quarter as both hog and cattle prices rose. However, in December, the outbreak of avian flu began to impact livestock, particularly cattle, adding to market volatility. The virus' spread fueled concerns about supply shortages and potential culling, driving up cattle prices. Stricter biosecurity measures and higher operational costs further strained livestock producers, impacting market dynamics.

The agriculture sector was unchanged in the quarter. Cocoa, a key component of the CMCITR, delivered exceptional returns, with London Cocoa surging approximately +88% and regular cocoa up around +77%. Coffee also posted strong gains, with returns of around +20%. However, these impressive performances were offset by losses in grains and sugar, which diminished the overall gains in the sector.

Precious metals declined during the quarter, driven primarily by losses in silver. Gold prices experienced a modest decline of about 1% toward the end of the quarter, driven by a stronger U.S. dollar and investors cashing out gains. The impact of gold on the CMCITR was minimal, given its modest allocation of approximately 5%, compared to BCOMTR’s higher allocation of around 17%. Silver posted a return of about -7%, but its 1% weighting in the CMCITR had a negligible effect on the index's overall performance.

Industrial metals weakened during Q4, with copper prices dropping approximately 10% and nickel prices falling 12%. Persistent concerns over China’s sluggish economic growth and the absence of robust policy measures prompted investors to reduce their exposure to the sector.

The charts below highlight the impact of sector weights on performance.

CMCITR’s lighter allocation in precious metals mitigated potential performance challenges.

Comparative Index Sector Weights

Source: VanEck, Bloomberg. Data as of December 2024.

CMCITR’s strategic focus, with a lighter allocation in precious metals and stronger emphasis in agriculture, when compared to BCOM, played a key role in mitigating potential performance challenges.

CMCITR outperforms BCOM in livestock and industrial metals, highlighting its strength in sector allocations.

Estimated Q4 2024 Total Return by Sector

Source: VanEck, Bloomberg. Data as of December 2024.