Below is a quote from an article published by Reuters on November 9, 2021:
“We expect a structural bull market in commodities, very similar to what we saw in the 2000s or the 1970s,” Jeffrey Currie, Goldman Sachs global head of commodities research, told the Reuters Commodities Summit.
This is another quote from the same article:
Fossil fuels and metals markets have been boosted by an upturn in demand as countries emerge from restrictions aimed at curbing the pandemic.
Below is a weekly chart of Aluminum Alloy – LME Official Cash.
Note that prices peaked last October before the war in Europe started and remain close to 2008 highs.
Below is a weekly chart of Thermal Coal Spot.
Prices for coal also made a peak last October before the war started and are now at new all-time highs.
Below is a weekly chart of Copper – LME Official Cash
The uptrend started in April 2020 and prices remain near all-time highs above 2008 highs.
Below is a weekly chart of Heating Oil Spot.
The uptrend in heating oil also started in April 2020 and prices have risen close to 2008 highs.
Below is a weekly chart of LMEX Index.
The LMEX index is based on a basket consisting of aluminum, copper, nickel, zinc, tin, and lead. The index uses futures contracts traded on the London Metals Exchange. The LMEX index is now at new all-time highs.
There are several other commodity charts that indicate a commodity supercycle has already started. Some analysts and traders think this can be reversed quickly but it could be wishful thinking. When these cycles start it takes significant force to reverse them. What could be such force? A worldwide recession?
Still, even if central banks decide to aggressively hike rates, there will be a significant lag before normalization. Supply chain disruptions and labor shortages were the main driver for this commodity rally. Now a war comes to add more fuel to the rally while central banks have been for a while behind the curve unwilling to upset equity markets.
Unless there is some coordinated action and a massive effort to normalize supply at the presence of rising demand, throwing economies into a recession will be the only way to avoid rising inflation. I’m not optimistic either way. A new commodities supercycle will cause serious problems to economies around the world while recession will lead to unemployment and possibly lower equity markets.
Who will benefit? There are always those who benefits amid turmoil. Commodity producing countries could benefit but the rising US dollar due to the war is a limiting factor.
On top of the pandemic and war there is also the push to green energy that exacerbates the problem. There is significant spillover from rising energy markets to other commodity markets at the expense of equities that were overvalued at the start of the commodities rally. DBC and DBA ETFs are up year-to-date 23.4% and 8.5%, respectively, while SPY and QQQ are down 7.8% and 12.8%, respectively.
Aggressive rate increases could possible reverse the commodities trend but at the expense of a deep recession. There are limited choices at this point.