Commodities are in motion. Copper hit an eight-year high and lumber tripled in one year. Is this the beginning of a commodity supercycle, or are these price movements “transient,” as the Federal Reserve tells us?
To answer this question, it is important to determine why prices are going up. Veteran futures trader Jack Bouroujian called “global supply disruptions” as the main driver of growth. Bob Yacchino, co-founder and chief market strategist at Path Trading Partners, agreed and added that there is also a phenomenon of “demand first slump and then spike” as the worst of the pandemic are over.
Perhaps this explanation could be an oversimplification. If commodity markets were entirely driven by supply chain disruptions and volatile demand fluctuations, why would gold rise 20% and bitcoin 900%? It is clear that the supply of these assets has remained fairly constant. The answer is that there must also be an element of trust in the currency in this story.
The perfect storm of drivers
Most major central banks have cut rates and speeded up spending significantly to ease the pain of blockages, and this has raised some concerns. The US national debt alone has increased by as much as 16% since the start of the pandemic. When asked about Bitcoin’s meteoric rise, Bob Yachchino said that “Bitcoin seems to be responding to the global currency devaluation.” I think this is the most important point in this discussion. If the world’s central banks are all in unison adding incentives, then perhaps traditional methods of valuing currencies are less reliable.
It appears that commodities, especially industrial and non-ferrous metals, are responding to the perfect storm of drivers. Organic demand, lingering supply disruptions and the desire to hedge dollar risks following recent monetary policy seem to play a role.
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