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What's Been Driving Commodities?

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  • Commodity indexes are rallying as government stimulus and low interest rates fuel inflation expectations.
  • Commodities can help investors hedge against inflation and diversify portfolios.
  • Commodity exchange traded products (ETPs) offer convenient and affordable access to broad baskets of commodities.

By Gargi Pal Chaudhuri

Expectations for rising inflation in a strengthening, post-COVID economy have helped lift commodity prices in 2021, and recent moves highlight how commodities can offer diversification as markets price in potential risks of stimulus-fueled growth.

Commodities, as represented by the S&P GSCI - a benchmark of 24 commodities in agriculture, energy and metals - is the top-performing asset class through the middle of March, up 15% through March 26, outpacing all other asset classes.1 It's a sharp turnabout from 2020 when commodities lagged behind stocks and bonds.

Commodities and inflationary forces

Commodity price gains in part appear to reflect the growing demand for raw materials such as copper for use on the factory floor and to build renewable energy infrastructure, and we expect that trend to continue.2 This follows severe pandemic-related disruptions in the global supply chain which accelerated a shift to localized production, limiting supply and pressuring raw material exports. With inventories remaining tight and commodity capacity constrained, copper, aluminum, palladium, corn all recently traded at multi-year highs, and oil prices have recovered to pre-COVID levels.3

Extraordinary fiscal action from policymakers will aid the economic recovery in the near term but is raising questions about the potential for longer-term inflationary pressure. The discretionary fiscal response so far from global policymakers in response to the pandemic is about four times larger than after the global financial crisis, according to the BlackRock Investment Institute.

Rising commodities indexes may be a reflection of increased inflation expectations

Line chart showing commodities indexes and inflation expectations

Bloomberg, as of 3/26/2021. Index performance is for illustrative purposes only. The green line represents the S&P GSCI Total Return Index, an index composed of a diversified group of commodities futures including energy, industrial and precious metals, agricultural, and livestock. The US 10-year breakeven rate measures the difference between the 10-year Treasury Bond and Treasury Inflation Protected Securities (TIPS). The breakeven rate serves

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Comments (5)

josephaoppenheim profile picture
Also climate change, causing more extreme weather events thus more rebuilding and replacements. And more protectionism thus more tariffs and disruption of supply chains.
T-time profile picture
@josephaoppenheim Yes but that is a slower moving factor. A much faster moving factor today is increased regulation globally. To recover most commodities means dealing with heavy government regulations (mining, farming, etc.) so I agree with Rick Rule when he says it is not about demand (which actually will likely grow coming out of COVID) but SUPPLY - which will be under immense pressure from inflation, taxes and regulations. You can blame Biden but it was coming anyway. "Trumpism" has no legs when governments are in power and that phase of history was only a small correction toward a strong move to globalism.
@T-time so are oil prices going up or down ?
josephaoppenheim profile picture
@n00binvest19 ...No one knows the future. There was a Depression in the oil industry, causing mass unemployment in the industry when oil was super cheap. Now, the oil price is about right for workers and consumers now that higher gas mileage standards are back to vehicles getting better gas mileage.
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