What does 2013 hold for commodities?

It might seem churlish to complain about the mediocre returns delivered by commodities during 2012 given the consistently strong performance of this asset class over the past decade.

Still, this is not what we were told to expect by bulls who sold investors the idea of the commodities "super cycle" - they promised us it would last a great deal longer.

Commodities investors would benefit from a unique confluence of positive factors, those bulls predicted, with huge demand from the industrialisation and urbanisation of the BRIC (Brazil, Russia, India and China) economies combined with two decades of under-investment holding back supply.

In 2012, however, that confluence was confounded. Gold may have posted gains of 10% or so, but few other commodities repeated the trick. The completely flat oil price has been much more typical: the Standard & Poor's/Goldman Sachs Commodity Index, comprising 24 raw materials, was up less than 1%, having quadrupled since 2001.

Many analysts believe such stellar returns are gone for good. "No longer will a pure 'long-only' strategy bring the returns expected in 2002 to 2008. Nor will conditions approximating those of the last decade return any time soon," says Edward Morse, global head of commodities research at Citigroup.

It could have been worse. At one stage in 2012, the S&P/GS index was more than 20% down. Oil recovered from $90 (£56) a barrel to above $110. Certain soft commodities, notably soybeans, hit record highs in 2012. And everywhere you look, prices remain at levels investors could only have dreamed of in the lean years of the 1980s and 1990s, before the super cycle began. Oil then traded at an average of $18.50 a barrel. Iron ore now trades at around $120 a tonne, well down from its peak of $200, but miles ahead of the $15 or so that was once typical.

Still, from here on, investors in commodities will have to be much more discerning, says Morse. Returns will be much more "differentiated" between individual commodities, he warns.

The problem, points out Ric Deverell, head of commodities research at Credit Suisse, is that "changes in broad measures of commodity prices are almost always and everywhere a function of global growth".

In a global economy still struggling to move beyond the shock of the financial crisis four years ago, that is an unpalatable home truth. In the world's biggest economy, the US, growth does finally seem to be edging upwards, but the recovery is fragile and tentative, while in Europe it has yet to begin.

Above all, however, it is China, whose commodity-intensive growth since 2002 has really driven prices, that gives most cause for concern. Opinions vary on whether China is heading for a hard or soft landing, but not on the likelihood that growth will now slow to single digits in the years ahead. Demand for commodities from the East will therefore moderate.

How then does an investor become more discerning in a world where the super cycle is, at best, no longer so reliable?

Precious metal picks

Well, the first point to make is that leaving aside the fundamentals of supply and demand, precious metals are a traditional home for investors worried about economic turmoil and inflationary risk.

"Inflation is key for real assets," says Darius McDermott, managing director at Chelsea Financial Services. "The US Federal Reserve's removal of its inflation statement means the US is happy to let inflation run - combine this with interest rates on hold and a weaker US dollar, and it is likely gold will rise higher."

Ian Williams of specialist fund management group Charteris also thinks gold can rise, but he's far more bullish about the prospects for silver. It should also benefit from monetary policy easing in the US, Williams argues, but is also heading for big gains according to technical analysis of recent price movements.

"One of the golden rules of forecasting is to make a prediction on either the price or the date but never both, especially at the same time," he says. "We are about to break the golden rule and forecast that silver is about to enter a sustained bull market that will take the price from the current level of $32 an ounce to $165 an ounce and we expect this price to be hit at the end of October 2015."

Caution on hard commodities

It is much more difficult to be positive about hard commodities where price movements are more closely aligned to economic growth. Credit Suisse's latest bulletin on prospects for commodities in 2013 includes downgraded forecasts for oil, coal and gas, as well as for iron ore, and for base metals including copper and aluminium. In most cases, it predicts very modest price increases next year, but with upwards momentum being regularly held back.

That view is shared by Stephen Briggs, a commodities analyst at BNP Paribas. "In the short term, base metal prices are likely to continue to be driven largely by sentiment about the eurozone crisis, economic prospects in China, the fiscal cliff and the shape of fresh quantitative easing measures in the US, and by associated moves in the US dollar," he argues.

Foodstuffs upside

By contrast, the most interesting commodity play of all in 2013 could be "softs" - foodstuffs. It is not just that global population growth is a powerful driver of demand, but also that the middle classes are swelling in numbers in places such as China and Africa, boosting demand for protein from cattle (and the feed they consume). Moreover, while soft commodities have generally not benefited from the super cycle in such dramatic style, prices have corrected this year.

"Prices are misaligned with fundamentals and will start to correct to the upside over the next quarter on resilient demand and still-tight supply in some markets," argues Abah Ofon, an analyst at Standard Chartered Bank. He's predicting significantly higher prices in 2013 for soybeans, for corn and particularly for wheat.

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Are you planning to invest in the commodities market? David Prosser examines this year's options for trading raw materials in: How to play commodities in 2013.

Start your path to prosperity today. Money Observer's 2013 Wealth Creation Guide offers share picks; funds and trusts to watch for income and growth; and a host of investment strategies and themes from the experts.