Commodities bounced back Monday after a drubbing last week triggered by an increasingly inflation-wary Federal Reserve. Both history and fundamentals show the one-day rally could be turned into an honest-to-goodness winning streak, according to strategists.
Copper gained 0.7% on Monday after dropping 8.3% last week, while gold advanced 0.8% after falling 5.8%. And the Bloomberg Commodity Index was up 0.6% after falling 2.9% last week. The index has 23 commodities futures in six sectors: energy, grains, livestock, precious metals, food and fibers, and industrial metals.
Commodities had been on a good run before Fed’s statement on monetary policy was released. The Fed, however, signaled two possible rate hikes in 2023 and acknowledged that members have started to discuss tapering—or reducing—the size of its bond purchasing program. That caused bond yields to tumble and the U.S. dollar to rise, both negative for commodities, which are priced in the greenback.
But tapering might not be too damaging to the commodities complex. During the “Taper Tantrum” in 2013, brought on by the Fed’s abrupt decision to reduce its bond purchases, the Bloomberg Commodity Index fell just over 2% in three months, from the end of May to the end of August, according to Gavekal Research. That was the second-best performance—behind the
—out of 12 assets that Gavekal tracked for that time period.
That outperformance suggests that the strength of the economy may play a bigger role for commodity prices than monetary policy, Sikand writes. “This seemingly counterintuitive outperformance by the ultimate pro-cyclical asset [commodities] during a period of violent risk-off sentiment does point to fundamental demand-supply conditions being more important for commodities than financing conditions,” the Sikand writes.
And current supply-demand dynamics favor higher commodity prices right now. Gavekal’s data show that inventory of several metals, including copper, has trended downward in 2021. Demand, on the other hand, is expected to be strong as the globe sharply recovers from the Covid-19 pandemic.
“Consequently, the outlook for commodity prices remains tilted towards the upside,” Sikand writes.
The takeaway for investors: A pause can be just that—and nothing more. Commodities may have history and economic fundamentals on their side.
Write to Jacob Sonenshine at email@example.com