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Expect to see commodities rise because the dollar will keep falling, analysts say

  • There's good news ahead for commodities, with a particular bet on metals as the outlook for the dollar looks to stay grim, experts are saying.
  • DoubleLine CEO Jeffrey Gundlach made a call for commodities on a webcast Tuesday, during which he predicted commodities would soon outperform stocks.
  • Copper, palladium, and more recently platinum and gold have all seen a pickup in the last three months after the more pervasive dollar weakness.
Leonhard Foeger | Reuters

There's good news ahead for commodities, with a particular bet on metals, as the outlook for the dollar looks to stay grim, according to experts.

DoubleLine Capital CEO Jeffrey Gundlach made a call for commodities on a webcast Tuesday, during which he predicted commodities would soon outperform stocks. This correlates with the weakness of the dollar, which in the last week hit its lowest levels in more than three years.

"Usually when you get a bad year in the dollar, it's followed by one or two more bad years," Gundlach said.

Analysts speaking to CNBC agreed, noting that the euro's strength and broad-based global growth will also buoy commodities through 2018.

"It's absolutely true that even though in the course of 2017 the correlation between oil commodities generally, and the dollar, has weakened, it is still a very very big driver. And the causality really goes from the dollar, to commodity prices," said Sabine Schels, head of fundamental commodities research at Bank of America Merrill Lynch.

Oil prices are still on track for a fifth monthly gain, despite U.S. crude slipping this week amid a sell-off in both stocks and commodities.

Copper, palladium, and more recently platinum and gold have all seen a pickup in the last three months following the more pervasive dollar weakness. This is a huge relief for commodities exporters, particularly across many natural resource-dependent countries in South America and Africa, which saw their economies tank when commodity prices plummeted in 2015.

Ultimately, the direction of the dollar remains a key question for many of these commodities. This is because the dollar is the benchmark for pricing and buying commodities, so a weak dollar means it costs more dollars to buy commodities and a lesser amount of the currencies of the resource-producing countries. Conversely, a strong dollar often decreases the dollar price of commodities.

"Our house view is for euro/dollar to weaken to 1.10 at the end of the first quarter, partly because of tax reform," Schels said. But she believes that the market is now taking an opposite view, possibly sensing that "this tax deal isn't as deficit-neutral as the government would make you believe," and is thus "a bit more negative on the U.S. economy in the longer term."

The World Bank in its Commodity Markets Outlook last fall said prices for energy commodities, which include oil, natural gas and coal, are forecast to climb 4 percent in 2018 after a 28 percent leap last year.

Schels surmised that if the euro continues to strengthen, it will be a positive driver for all commodities. "It's very interesting that not only has oil rallied, not only have industrial metals been benefiting from this move in the dollar, but also gold has responded."

Gold rebounded Wednesday as the dollar slipped, edging back up to $1,347 per ounce as the U.S. stock market steadied from a dramatic two-day drop. Copper is also up more than 1 percent as base metals rally, thanks to more dollar jitters ahead of the Federal Reserve's decision on interest rates.