Looking at the commodity market from a wider perspective in terms of price and time, we may see that at a time when many markets were undergoing a boom (stocks, bonds), we were dealing with a 9-year bear market in commodity prices.
From 2011 to March 2020 the broad GSCI (Goldman Sachs Commodity Index) fell by about 70 percent. At that time oil, copper, silver or agricultural products seemed to be falling. The drop in prices in this market segment could undoubtedly also translate into a lack of inflationary pressure in the world economy. Nevertheless, if one compares what happened after 2009, i.e. after the great financial crisis, to what is happening now with an attempt to get out of the global lockdown and pandemic, the prices of commodities may have the best to come.
From the point of view of the business cycle, before the pandemic the world was, depending on its region, in a disinflationary or inflationary slowdown. This is the phase of the cycle occurring before the recession, which the epidemic undoubtedly accelerated and deepened. Meanwhile, in theory, after a recession there comes a time for economic recovery and then for economic boom. This seems to be already discounting the markets. In addition, central banks may begin to tolerate higher inflation, which may mean an inflationary phase of economic recovery, and it is during this phase that a good time for commodities may come.
Since the low of March/April, the GSCI index has already increased by less than 90 percent, but it is still reaching the levels observed at the beginning of 2020. What is more, the previous decade of falling prices may have caused a drop in investments in this sector and thus a decrease in production capacity of mines and steel mills. However, due to the launch of many infrastructure projects around the world, the current surge in demand for commodities may, with little supply, lead to a rapid increase in prices before production capacity increases again and the market stabilizes. However, this may take many months.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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