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Commodities storming back into bull market

After four years of depressed prices for most commodities, especially gold, iron ore, coal, copper and oil, the end of the bear market seems closer than ever as raw materials continue to outperform bonds, currencies and equities.

Based on the Bloomberg Commodity Index, which tracks returns from 22 raw materials, everything from soybeans to diamonds have experienced an important recovery this year.

Oil is already back to $50 per barrel. A similar jump is visible in non-ferrous metals like copper, zinc and aluminum, to name a few.

As a result, the index is on track to close more than 20% above its low on Jan. 20, meeting the common definition of a bull market, even though it is still down almost 50% from the high reached in 2011.

While there are some specific commodities which may face some downside pressure like soybeans and sugar, an increasing number of experts — such as ABN Amro and Schroders Asset Management — are saying there is far more upside potential for other materials, mainly metals and energy.

Crude oil is already back to $50 per barrel. A similar jump is visible in non-ferrous metals like copper, zinc and aluminum, to name a few.

Canadian stocks are among those that have benefitted the most from the ongoing recovery. The S&P/TSX Composite Index climbed 0.6 per cent to 14,226.78 Friday, capping a 20% rally from a bear-market low of 11,843.11 on Jan. 20.

In barely four months, Canada’s mining and energy sectors have added more than Cdn$370 billion ($286bn) as oil prices climbed over 80% over that time, stoking growth in the export-oriented economy, the world’s 11th largest.

“Wild swings” ahead

Despite the positive figures, some remain cautious. Citigroup said last month that while commodities have “turned a corner,” the potential for wild swings in prices this year remains high.

“The past few years have demonstrated that changes in market sentiment can be abrupt and can affect both price direction and cross commodity and cross asset correlations,” Citi analysts wrote.

“We expect these persistent features of markets to start to dissipate,” the analysts added. “But the interrelated factors of changes in views about the Chinese economy and actual changes in the U.S. Fed’s monetary policy can directly and indirectly impact commodities, both with respect to expectations of global growth and of the relative value of the U.S. dollar.”

As predicted, Wall Street was higher on Monday morning, lifted mostly by energy stocks and a rebound in financial stocks, as investors awaited a speech by Federal Reserve Chair Janet Yellen for clues on when borrowing costs may rise.