Feeding the Commodity Rally
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The portfolios are feeling the pull from strength in precious metals and energy, which is good news and not before time. Commodity prices collapsed in the early stages of the pandemic, only to surge later on. After adjusting for inflation, commodities are at the same level as they were 30 years ago and appear to be rising.
Commodity Prices
Within commodities, there has been divergence. We’ve seen gold, which has surged nine times since $255 at the 1999 low. Then we have food prices, which have appreciated by much less.
When it comes to the cost of production, food follows the oil price, as that is the highest input cost, whether it is for powering machinery or acquiring fertiliser. Oil and food prices are down from the post-pandemic peak, and oil is rising again. It is relatively safe to assume that food prices will follow, as the lower scale (purple) shows that food is trading below the food-to-oil ratio post the 2014 average.
Food Prices Follow Oil
The pandemic spike may have exaggerated that average, but I highlight 2015/6, where there was no pandemic, yet food prices remained firm. The 2005 to 2014 average was much lower than the past ten years, implying that something has changed. Note that 2014 was the year of the US shale boom when prices collapsed. However you look at it, it costs more to produce food today, relative to oil, than it did back then.
I don’t know how long this commodity bull run lasts, but gold has taken the lead. That means it is monetary, which means gold goes up first, and everything else follows. It isn’t so much a demand boom like we had when China enjoyed a double-digit growth rate before the financial crisis, but a scramble for real assets. This is what happened to commodity prices in the 1970s. Gold led, and everything else followed. I sense an opportunity.
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