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Commodities rally in December 2020 as analysts see bright prospects for 2021

The commodities complex advanced further in December 2020 amid hopes for a continued revival of demand following a turbulent year that sent ripples across all asset classes.

The S&P GSCI index, which tracks futures for 24 raw materials, rose 6.2% month over month to trim its full-year losses to slightly above 6% from 11.6% in November 2020. Energy commodities was the main laggard in 2020 due to the impact of the pandemic on global oil demand as well as the price war between Saudi Arabia and Russia earlier in the year.

Looking ahead, analysts expect commodities to continue to tread higher amid a continued global economic recovery and prospects of further stimulus.

"Significant growth in money supply, rock-bottom interest rates and fiscal stimulus have boosted inflation expectations; therefore, we expect to see more money flowing into commodities with speculators boosting their long position, notably in metals and agricultural," ING commodity analysts Warren Patterson and Wenyu Yao said in a Dec. 8, 2020, report outlining the outlook for the sector this year.

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Copper, platinum and soybeans are among the commodities that could benefit from an anticipated pickup in demand and inflation expectations, said Ole Hansen, head of commodity strategy at Saxo Bank, in a Dec. 18, 2020, note.

December 2020 rally

Grains led commodities in the final month of 2020 with a nearly 12% monthly jump, as China continued to buoy demand for agricultural products. Soybeans rallied more than 37% last year, with a 12.2% increase in December 2020 alone. Corn and wheat also registered double-digit increases last month.

ING analysts believe that the phase-one trade deal with the U.S. and China's efforts to ensure food security amid the pandemic contributed to the Asian country's robust agri purchases last year. Barring significant cancellations, this trend is expected to extend into 2021 and continue to bode well for the U.S. and Brazil — two big beneficiaries of China's heightened appetite for agri imports.

Meanwhile, energy futures climbed 6.7% in December 2020 from the prior month, with the Brent crude index up 8.2%.

Oil is expected to receive further support after a surprise announcement from Saudi Arabia that it would cut production by 1 million barrels per day in February and March, while Russia and Kazakhstan would up their output by 75,000 barrels per day over the same period.

"While the decision to delay planned output increases is bullish for oil prices on its own, the fact that the diverse group of oil-producing countries were able to work through previously strained relations to coordinate production is perhaps the bigger takeaway," said Matt Weller, global head of market research at GAIN Capital, in a Jan. 5 note.

The latest development surrounding relations between Russia and Saudi Arabia also lowers the downside risks to oil prices, Weller added.

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Meanwhile, gold returned to growth after four consecutive months of contraction as it climbed 6.4% in December 2020.

Positive vaccine developments "could slow but not end the gold market bull cycle" in the first half of 2021 as long as the U.S. Federal Reserve maintains its accommodative policy, commits to dovish forward guidance and continues with its quantitative easing program, Citi analysts said in a Dec. 16, 2020, research note.

However, prices may moderate in the second half on the back of wider vaccine distribution and a growth recovery, the analysts added. Citi forecasts the yellow metal to move toward $2,100 per ounce over the next six to nine months before moderating next year.

Silver sustained its momentum with a 16.9% December 2020 finish, bringing its full-year growth to more than 47%. Elsewhere, copper rose 2.4% month over month to surpass gold's year-to-date gains, while nickel advanced 3.6%.