Weekly Brief: Commodities Are The Cause Of (And Solution To) A Lot Of Your Problems

Weekly Brief: Commodities Are The Cause Of (And Solution To) A Lot Of Your Problems

over 2 years ago3 mins

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With commodities going from strength to strength this year, they might just be both the cause of and the solution to a lot of investors’ problems…

🕰 Recap

  • Last April, the price of a barrel of oil fell to its lowest level since 1986
  • But by October, all was forgotten as analysts recommended stocking up on commodities like silver and copper
  • In early May, a key index tracking commodity prices rose to a decade high
  • And by the end of the month, China was looking for ways to reduce the prices of the key metals its economy relies on

✍️ Connecting The Dots

The prices of commodities, broadly speaking, track the direction of the global economy. When it’s growing, after all, there’s more demand for oil in transportation and production, for metals in manufacturing and construction, and – less so – for crops and livestock to feed people as they spend more on food.

Hot on the heels of the biggest global economic disruption in recent history, the economy is very much in the “growth” camp right now. And that goes some way to explaining why commodity prices are as high as they are: oil’s price is back with a vengeance after falling to zero last year, and lumber – a major yet often-ignored component of US housing – hit record highs earlier this year.

That’s all fed into record highs for inflation – the rate at which the prices of goods and services increase. That makes sense: companies that have to pay more for oils and metals can either accept lower profit margins or pass their higher costs onto consumers. And if they choose the latter, that’ll push up the prices of their goods and services and, in turn, “consumer price inflation”.

Of course, there’s a third option if you happen to be China: summon the top execs from the country’s metal producers to a meeting and make three separate demands of them. One: don’t collude in order to manipulate prices. Two: share only accurate information about supply and demand levels. And three: don’t hoard materials to drive up prices. It certainly seemed to work: the prices of commodities including iron ore, aluminum, and steel initially dropped in response.

🥡 Takeaways

1. Commodities are a way to get ahead of inflation.

People may spend less if inflation’s too high for too long, which would slow economic and company earnings growth and send stock prices spiraling. But investing in commodities is one way to limit inflation’s impact on your portfolio. It’s partly their price rises driving inflation everywhere else, so you’d profit along the way and partially offset any damage done to your stock holdings.

2. There’s a big opportunity in copper right now.

Copper will be critical in achieving the goals of the Paris Climate Agreement. And while it’s started dawning on companies, governments, and investors just how much of it will be needed (demand will grow an estimated 600% by 2030), the copper mining industry’s been twiddling its thumbs. So it’s likely we’re heading for a major shortage, which Goldman Sachs estimates could push copper’s price up over 50% higher than it is now by 2025.

🎯 Also On Our Radar

Analysts have been highlighting the looming “death cross” threatening to send bitcoin’s price falling further. And last week, JPMorgan flagged another issue that risks sending the price of the cryptocurrency tumbling: the investment bank argues that the bitcoin futures market – which is currently in “backwardation” – shows demand from big investors simply isn’t there.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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