Back in early February, I penned an article about the growing calls of a commodities supercycle and my skepticism. “I may well be wrong but I don’t see an end to issues around China, Iran, and Syria to name a few. I do see continued geopolitical risks and issues causing friction in markets. I don’t see the USD getting much weaker in the medium-term, I see oil markets awash with oil and I do expect some social push back to say the least once the general person in the street begins to understand climate policy and its impact on the pocketbook. The yellow jackets might be out in force in the future…. So, I’ll go with a bit of a short-term commodities boom for now and adjust my position as we fly,” I wrote at the time. Now it seems, Bloomberg anyway is also growing skeptical saying “Money managers are trimming what had been the largest wager for rising commodity prices in at least a decade as stumbling economic reopening efforts force a reconsideration of the popular recovery trade. A recent bond rout raised worries over inflation and surging bulk shipping rates are seen capping any further upswing.”
The Bloomberg article points to capital outflows from commodities, particularly oil, a stronger US Dollar, issues around post-COVID recovery, and so on. However, it focused on the cost of freight specifically. “The cost of shipping unpacked commodities like grains and iron ore, known as dry bulk, is up more than 50 per cent this year. The move up in shipping costs “makes it more expensive to move things around, which goes contrary to the idea of a supercycle,” Eddie Tofpik, head of technical analysis and senior markets analyst at ADM Investor Services International Ltd, said at an online event last month.”
Despite Bloomberg’s misgivings, Goldman did what investors often do – it doubled down… “Commodities remain the best performing asset class of 2021,” Goldman Sachs Group Inc analysts wrote in a report Friday. “We view this consolidation as nothing more than a fleeting speed bump created by logistical bottlenecks in vaccine roll-outs,” said the Bloomberg article. I personally think blaming vaccine rollouts is at best a stretch and possibly even a bit naive as a broader view of the world than the USA and UK suggest that vaccination rollouts will be long and mostly incomplete with many countries unable to accelerate programs or skeptical populations unwilling to comply. Other countries, like India, for example, have also increased reliance on other programs deemed cheaper and equally effective like the use of ivermectin, however politically unpalatable that may be to US politicians. However, I’m not a politician but rather just a lowly analyst who sees volatility ahead rather than a supercycle. Still, that’s good for business too.