1. The rally continues.
Overall, commodities markets will continue higher next as the dollar weakens further and provides more support. Long-term investors, pension and investment funds, will continue pouring money into the asset class. However, expect rotations out of some of this 2010’s leaders to some laggards. Also, future gains won’t be as sharp as in the past. If they are, consumers won’t be able to stomach it, eventually resulting in slower demand.
2. Oil prices will be range-bound.
Prices are likely to stay in the $70-$90 range of 2010. Leading OPEC members agree this is a “fair” price—and won't make any moves to change it. Quantitative easing measures, which drove oil to $88 a barrel this fall, won’t be enough to stimulate the US economy and produce a significant rise in demand.
China, the key driver of future demand, will keep try to curb inflation, slowing its economy and thus demand growth. A weaker dollar could send prices to the upper end of the range—or even higher, temporarily. But if that happens, unemployed consumers—and others—won’t be able to pay $3.50 a gallon for gasoline. Again, a lack of demand will drive prices back down.
3. ETF demand drives metals.
Copper, platinum and palladium move higher as investors pour money into new exchange-traded funds backed by the physical metal. The investment potential of these new funds and the fundamental support from industrial demand for these commodities, especially economies improve in the second half, will spark more spikes in copper and platinum group metals.
4. Silver trumps gold.
Gold and silver prices will likely reach new highs in the first half of the year as Western economies will still face slow growth and investors remain eager to preserve their wealth. Investment demand will continue to be strong fueled by exchange traded funds and central bank buying. Silver will continue to outperform gold on a percentage basis. Even if the economy recovers in the second half, and gold prices falter, silver prices should benefit from improved industrial demand.
5. Sharp corrections coming.
Investors will continue to turn to commodities as a proxy for the weaker dollar. But as they do they need to be mindful that someone actually has to use this stuff. Uninterrupted price run-ups do have detrimental consequences. While overall commodities—presented by the CRB index—will gain more ground, volatility in these markets will also remain high. Steep 10 to 15 percent corrections could become rather commonplace.