Time to sound a note of caution

Commodity prices continued their strong run in the early weeks of 2017, but we are concerned that investor optimism may fade in the months ahead. Prices have been buoyed by the pick-up in China’s economic activity and the likelihood of fiscal stimulus and stronger US growth in the first year of the Trump presidency. But we think activity is set to slow in China and that Mr Trump’s infrastructure spending plans will fall by the wayside. As such, we expect renewed downward pressure on some of the more industrial commodity prices. Meanwhile, it seems likely that a stronger dollar and aggressive monetary tightening in the US will prove too much for the price of gold. Nonetheless, we remain positive about the medium-term outlook for some commodities – including oil and several industrial metals where supply is under threat.