Worries Over Overshoot Raised By Commodities Prices

A furious rally in copper has sent it over $9,000 a tonne for the first time after 2011.

Following a dramatic recovery, Brent crude on Tuesday briefly passed $66 a barrel, the level at which it began a turbulent 2020. Corn is up nearly 17 percent since the beginning of 2021 to an almost eight-year high of $5.54 a bushel. The S&P GSCI spot index, which follows price movements for 24 raw materials, is up 17 percent this year.

As stated by sector specialists, forecasts of a so-called supercycle have attracted investors to commodities. The supercycle is an extended period of high prices as demand exceeds supply. Others are attempting to purchase real assets as protection against inflation.

Alastair Munro of Marex Spectron, a brokerage, states that the latest commodity price increases are being pushed by money inflows and inflationary expectations rather than genuine physical buyers.

Copper is heading for its most significant supply shortfall in a decade

Inflation is growing more of concern amongst investors due to the unprecedented monetary and fiscal policies enacted during the crisis. A weakening dollar is also getting commodities more affordable in other currencies, fanning demand. But some analysts worry that the inflation trade could become self-fulfilling.

Ole Hansen, head of commodities strategy at Saxo Bank, says the market in danger of entering a “vicious cycle” where speculators and investors are watching for a hedge versus inflation fed off each other.

Dave Whitcomb of commodity specialist Peak Trading Research stated that speculative positions in agricultural futures contacts are just below the record high touched in early January. In China, the net theoretical long position in copper on the Shanghai Futures Exchange — the distinction between bets on growing and declining prices — has bounced sharply after the end of the lunar new year holiday.

Goldman Sachs and other big investment banks think that copper is heading for its most significant supply shortfall in decades. Production disappoints to keep pace with demand in China and the rest of the world. All this while government spending on green infrastructure rises. Nevertheless, some analysts are concerned that China’s policymakers will move to contract credit conditions to rein in asset bubbles. That could undermine its demand for industrial inputs.