By Jon Deane, CEO of InfiniGold
The financial uncertainty induced by Covid-19 has once again made the commodities market extremely appealing for investors, and now with prices surging, is a new supercycle beginning?
It’s no secret that the ongoing coronavirus pandemic has forced investors all over the world to rethink their market strategies in a big way, especially as global stock markets have continued to exhibit a tremendous amount of uncertainty over the last year or so.
For commodities, though, 2020 was not all bad. In August, gold topped $2,000 an ounce for the first time ever, increasing by 16.8% in U.S.-dollar terms as low-interest rates made the precious metal a more appealing haven than Treasuries, even outperforming many prominent asset classes in the process. Gold can act as an insurance policy against monetary devaluation, especially if the dollar weakens. Dollar weakness has traditionally led to gold prices rising, and with a globally-led devaluation of fiat currencies, more so than ever, we anticipate higher gold prices.
Silver is another precious metal that has witnessed significant gains over the last year, touching the $30/oz mark in early August—a price point it hadn’t achieved in more than five years. However, what makes silver an underrated investment opportunity is its place in various industrial applications, especially since a number of products and chemical processes make use of this metal. One such application is in solar panels, and with the Biden-Harris Administration coming into power, we can anticipate a more aggressive approach to the reduction of fossil fuels.
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Gold’s performance versus other major asset classes (source: Bloomberg)
The aforementioned data indicates a clear rise in interest from the global investor community in regards to diversifying their existing portfolios. By including alternative assets, investors not only minimize their overall risk but also reap other potential benefits such as reduced volatility, additional opportunities for regular income, as well as a clear safeguard against adverse market cycles.
Commodities poised for a bull market
A number of studies suggest that the metal and agriculture sectors are all set to rope in respectable gains over the course of 2021. This could be due to fears of inflation becoming increasingly prominent, primarily because of factors like falling interest rates and the continuing issuance of fiscal stimulus packages by governments worldwide as further waves of the coronavirus pandemic are experienced. As a result, money is expected to flow into commodities with speculators boosting their long position, notably in metals and agricultural.
Oil has also seen some speculative interest, and the debate is now how quickly oil prices will recover, with Goldman Sachs forecasting $65 Oil by the summer and how high other commodities may soar. With the introduction of vaccines, global travel will return, which will, in turn, increase the demand in these commodities.
There is room for more buying in the energy space over 2021 too, especially as Covid-19 has led to a renewed push for a greener future - a trend that is constructive for several metals - including iron ore, copper, zinc and aluminum - as well as silver. All are driven by industrial demand, which should revive on consumer-focused stimulus and accelerated infrastructure investment, including in green technology.
Further, with many powerhouse nations like China and India investing massive sums of money on global infrastructure projects, commodity prices will continue to appreciate, since such large scale projects generate a high demand for various natural resources. For example, China’s Belt and Road Initiative (BRI) — also referred to as the New Silk Road — seeks to connect East Asia with Europe via a highly sophisticated land route that spans nearly 60 countries. Initiated in 2013 by President Xi Jinping, it is estimated that over the course of its entire construction lifecycle, expenses related to the BRI could reach $1.2–1.3 trillion by 2027.
Is a Commodities supercycle incoming?
With copper topping the $8,000 per tonne price point in over seven years recently, as well as another virus-relief package (estimated to be worth $900 billion), looming large on the horizon - analysts for Goldman Sachs Group and BlackRock are the latest to point out that a commodities supercycle may be beginning. Higher commodity prices naturally lead to higher levels of observed inflation through traditional indicators like CPI.
The pandemic itself is a structural catalyst for a commodity supercycle. In addition to a weaker dollar and the accompanying boost for commodities, the pandemic may have the effect of synchronizing activity across some of the world’s biggest economies. China's relative success in containing the spread of the pandemic and investor optimism regarding the growth of markets across the board in 2021 — especially as vaccines are rolled out globally — has already started fueling gains across industrial commodities ranging from iron ore to oil.
A commodities supercycle is where a range of base material prices continue to hover well above their long-standing monetary trendlines for extended periods (in some cases even decades). Two prime examples of this include the 19th-century industrialization of the United States and the post-war reconstruction of Europe and Japan in the 1950s. The most recent supercycle was witnessed in the 2000s when BRIC nations — i.e., Brazil, Russia, India and China — started to showcase their dominance within the global manufacturing landscape.
Other indicators that suggest a supercycle may be incoming include precious metals such as gold and silver hitting multi-year highs, as well as crude oil reaching a price point of $50 per barrel. Not only that, but the dollar's ever-weakening value coupled with the rise of global liquidity may also result in a major commodities spike this year.
The impact of a global synchronized approach to fiscal spending, coupled with continued devaluation of fiat currencies all continues to point to higher inflation levels in 2021 and beyond. Inflation, while always a risk, has not reared its head for a number of decades. Investors continue to remain in underweight products that protect during periods of secular inflation, even though high levels of real inflation has not yet materialized. However, when coupled with a natural shift away from the 60/40 portfolio, due to long term correlations breaking down, demand for alternative assets could be accelerated significantly over the coming months.
New routes to market in 2021
One of the next big questions for 2021, though, is how best to access commodities markets and make them attractive to a whole new suite of investors? Tokenization is a potential answer by providing an alternative access point to physical commodities that go directly to the source of the underlying product. Eliminating the need for structured products or alternatives made available via third-party intermediaries. Therefore significantly reducing the operational, clearing and settlement risks.
Once tokenized, real-world commodities become digitized assets on the blockchain, allowing them to be traced, moved and traded much more easily 24/7, and against an array of other digital assets. Tokenized commodities can serve a broader range of wealth, bringing more activity, liquidity and depth to the markets. This stands to benefit both traders and the industry at large.
Though new, these tokens provide many benefits, such as fewer intermediaries, real-time 24/7 trading, and cryptographically secure instant settlements enabled by blockchain technology.
About The Author
Jon Deane has an extensive background in the commodities space, spending ten years at JPMorgan as a managing director and as the head of commodities trading in the Asia Pacific region. He is now CEO of InfiniGold.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
