Commodities have had a bruising ride since 2008 and remain among the most challenged asset classes today, but at least one has shone through the gloom - gold.

The yellow metal has held up well this year as one of the best performers across various commodities, with spot prices up 8 per cent to around US$1,248 per ounce on Friday.

The rise has come despite the United States Federal Reserve raising interest rates twice this year.

"Traditionally, gold prices tend to fall in a higher interest-rate environment as investors prefer to put their money in other asset classes that could earn them interest, such as stocks and bonds," notes Mr Robert Adair, director of global equities at UOB Asset Management.

"We believe the reason for gold's performance is that investors view it as a safe haven asset to hedge against economic and market uncertainty," he says, adding that the increase in price could be a reflection of concerns over the US economy given the recent mixed economic data.

Resilience in gold

Gold prices are driven by several factors - most pertinently US interest rates and risk appetites.

The metal typically rises when investors are bearish on the US economy and the greenback, and drops when the American economy is doing well.

Mr Adair explains: "This is because gold is often used by investors as a way to protect their investment portfolio from market and economic volatility."

So it came as little surprise that gold prices, following a strong run to nearly US$1,300 last month, dropped after the Fed revealed its outlook for one more rate hike in the second half of this year. Adding to that, it also plans to shrink its balance sheet in September.

"Some investors fear the prospect of an increasing base interest rate in the US (and see it as) reason alone to avoid these types of investments," Schroders' commodities team fund manager, Mr James Luke, notes in a recent report.

"However, although past performance is not a reliable indicator of future results, the gold price has tended to rise from the beginning to the end of the Fed hiking cycles," he adds, pointing to how gold reaped gains of 10 to 20 per cent in three of the last four instances when the Fed raised interest rates.

The environment for gold investments remains positive, says Mr Luke, noting that such investments "remain very under-owned".

"In the background, global record debt burdens have not magically vanished. These make global growth highly sensitive to any real increase in interest rates and the cost of servicing these debts.

"This is a key reason to expect that central banks will be highly wary of raising interest rates too quickly and that real interest rates (a key driver of gold prices) should continue to remain very low and have the possibility of being negative as inflation accelerates."

On top of that, the longstanding case for investing in gold - as a safe haven asset - continues to be one of its most attractive selling points.

"The primary reason for investing in commodities, and especially gold and silver, should always be as an inflation hedge," says Mr Luke.

"Given the printing of money by the world's central banks through quantitative easing, there is every reason to argue that higher inflation is coming in the future."

Research firm BMI Research says in a report that it remains positive on gold prices for this year and the next, and expects it to average US$1,250 per ounce this year and US$1,350 in 2018.

"Our view that the US Federal Reserve will not hike rates again in 2017 and only twice in 2018 underpins this positive view," it notes.

OCBC Bank economist Barnabas Gan, however, maintains a bearish outlook, tipping prices to fall to US$1,200 per ounce by the end of the year, primarily because of the Fed's projection for more rate hikes, combined with the prospect of similar moves by other central banks - all of which has already led investors on a chase for returns in other asset classes.

But he also notes that uncertainty began hogging the spotlight again earlier this month, which could bode well for gold.

A quick look at other commodities

CRUDE OIL

Oil prices have been weaker than expected this year despite initial optimism over the commitment by the Organisation of the Petroleum Exporting Countries (Opec) to curb output in a market still awash with crude supplies.

Global benchmark Brent crude stood at US$49 a barrel last Friday - an improvement on the US$45 levels seen last month but not much better than a year ago.

S&P Global Platts president Martin Fraenkel notes that while production cuts by Opec and some non-Opec countries have taken oil off the market, rising output from the US, Nigeria and Libya is piling on pressure and keeping inventories high. The US rig count for June, for instance, was up 124 per cent on the year.

"With oil prices under pressure, some participants wonder if Saudi Arabia and Opec might need to make even bigger cuts to speed (a drawdown) in global stocks - or if the strategy might eventually be abandoned for a new market share battle," says Mr Fraenkel.

"Oil demand is growing strongly, reflecting stable economic growth and consumer response to current energy prices... But stocks suggest Brent crude may stay around US$50 to US$55 a barrel for longer than Opec wished."

Many research houses, as a result, have lowered their forecasts for oil prices this year. DBS Group Research, for instance, cut expectations for Brent by US$5 per barrel to the US$50 to US$55 range.

"Nonetheless, we are hopeful for recovery in the second half of 2017... This rebalancing should accelerate into 2018 and lift average oil prices to US$55 to US$60 per barrel in 2018," it says in a report.

INDUSTRIAL METALS

A rebalancing in supply and demand dynamics is emerging in industrial metals, says DBS Chief Investment Office.

Earlier this year, a World Bank report forecast metals rising 16 per cent this year (after dropping nearly 7 per cent in 2016) on "strong demand and tightening markets for most metals".

In the aluminium market, for example, production is being constrained, new capacity growth has slowed and production costs are rising - all of which should help prices higher, notes the DBS report.

The copper market is likely to move into a supply deficit this year, which could worsen into 2018 on the back of stronger global economic growth and demand.

"Critical to this, of course, is China. As Chinese policymakers tap the brakes to limit the credit expansion fallout from recent growth, there could be some setback to demand. But we expect the Chinese to manage economic growth within a narrow band," it says.

AGRICULTURALS

Grain prices have performed well this year, especially rice and wheat, amid weather issues in Europe and the US.

BMI Research says it expects grain prices to head higher in the coming quarters. This is because it would not take much improvement in underlying supply and demand fundamentals to spark a substantial upside in prices, given that most speculative traders are placing significantly bearish bets on the commodity class.

"In fact, a spike in wheat prices at the start of July suggests that such a move may be starting to take place," it says.

Coffee is likely to climb slightly higher from now until 2021, with average prices to come in at US$1.35 per pound this year as the global market recovers from a supply deficit, while cocoa prices could strengthen from the fourth quarter and gradually trend higher as the market maintains balance in supply and demand.

Commodities or stocks?

Notably, both gold and the broader commodities market have racked up a lacklustre performance so far this year in comparison with global equities.

"US equities and the MSCI World Index performed very well in the first half of 2017 in spite of deteriorating fundamentals in the US economy and expensive US valuations," Mr John Davies, global commodities strategist at BMI Research, notes. The MSCI World Index is a broad global equity benchmark that represents large and mid-cap equity performance across 23 developed markets.

"Meanwhile, global commodity indices are slightly down year to date, mainly because they are heavily weighted towards energy prices."

The Bloomberg Commodity Index, which tracks 22 commodity futures contracts, has lost 4.23 per cent this year, even though it has climbed steadily from the lows seen in early 2016.

Mr Wayne Gordon, executive director for commodities and forex at UBS Wealth Management, says that broadly diversified commodity indices have much higher volatility compared with bonds, and struggle to meet the return performance of equities in the long run.

Gold, on the other hand, is known to have added long-term value to investors' portfolios via less overall volatility and better risk-adjusted returns, he notes.

"A sideways move in gold prices during non-crisis times makes gold an interesting insurance asset, as it comes with low opportunity costs. If equities correct (although this is not our base case), the price of gold would be north of US$1,300 per ounce," adds Mr Gordon.

Is now a good time for commodities?

The short answer from UBS' Mr Gordon is yes, as "the global economic growth stays above trend, (and) we see greater supply discipline and the US dollar staying weak".

"Moreover, in late stages of an economic cycle, commodities tend to perform particularly well," he adds.

BMI Research's Mr Davies believes commodities will eventually outperform equities in the coming quarters, although this is likely to be "more a case of equities correcting than of commodities rallying significantly from current levels".

"We remain cautious on the performance for US equities, in particular, as valuations are getting increasingly stretched. Meanwhile, we believe that global stocks are in the final innings of their bull market," he says.

"Our bullish view on oil prices in the second half of 2017 would help the performance of commodities relative to that of equities. As we expect gold to be a relatively strong performer, gold should also gradually begin outperforming equities."

For those wanting in on commodities, the cheap valuations would now be a draw.

DBS Chief Investment Office says the global oversupply in commodities has yet to fully unwind, and sentiment remains bearish. Yet, from a longer-term perspective, this is probably a good time to take a small position in commodities.

"Global economic growth is strengthening, albeit modestly. And supply is being worked down, albeit slowly. So there are cycles," it notes.

"And commodities - particularly industrial metals and crude oil - are probably close to the bottom of their respective cycles."