For the first time in decades, nearly every segment of the commodities markets is hitting new highs, enjoying what looks to be a long-term boom cycle that probably began as early as 2019 and received a huge boost from pent-up demand after the pandemic. In fact, once vaccines for COVID-19 became widely available, many of the most popular niches like energy, agriculture, and metals began setting all-time highs. In just the first five months of this year, the main com-index (S&P’s GSCI) is up more than 15 percent. But compared to where the numbers were one year ago, in early 2021, the same index has risen by more than 83 percent.
It’s now entirely possible that commodities as a group, could outperform bonds, stocks, and most other securities for the year. Consider some raw statistics that since this time last year, both copper and aluminum have doubled in price, hitting 10-year peaks along the way. Recently, lumber, iron ore, and the precious metal palladium reached all-time price highs. What’s going on, and how can ordinary investors get a piece of the action?
Here’s a quick look at factors and facts behind the recent surge in the global commodity markets.
How Can New Investors Take Advantage of an Up Market?
In markets that are trending strongly upward, one of the most advantageous ways to build a profitable commodities portfolio is to use buying leverage. The beauty of multiplying your buying potential means you can access higher amounts of the particular commodity you’re interested in, like copper or timber. And while leverage comes with the risk of loss as well as gain, it gives traders of all income levels the chance to participate in price rises and to bag significant profits. You can watch this leverage trading video if you want to learn more about these powerful trading techniques.
Are We Entering a Commodities Super Cycle?
What’s causing all the run-ups in prices of metals, lumber, and other key assets? There are at least three things that appear to be driving the upswing. First, the incredible amount of demand that was squelched during the pandemic is now coming to the surface. That means companies that didn’t want to, or couldn’t buy input materials during the pandemic are making up for lost time and trying hard to fill back-orders.
So, demand might be the most apparent cause of the price rises, but one less-obvious one is the availability of vaccines. Even when worldwide infection and death rates from COVID were declining, institutional investors seemed to not respond very quickly. But, when vaccines began to appear, and millions of people lined up for them, many asset markets took notice. It was as if the vaccines were proof that the pandemic was finally turning around, and that the economy was turning the corner.
Third, several governments, notably the U.S., has signaled an intention to begin a period of heavy investment in green energy technologies. By their very nature, green products rely strongly on the efficient production of commodities. So, when green energy initiatives, infrastructure projects, and stimulus programs began to show up on legislative agendas, prices got yet another boost.
Potential Returns
One of the most interesting aspects of commodity trading is that when prices go up for assets like gold, lumber, copper, corn, and lithium, there is often a corresponding increase in the price of stocks in related industries. For instance, when the price of copper rises, companies involved in mining and processing the metal tend to do well. But, there’s more to the potential returns than that. Prices of key commodity assets typically rise when the economy is recovering from a down period. Likewise, price levels go up in times of inflation, in response to raw demand, and as a result of government investment in environmental programs.
Diversification and Hedging Against Inflation
For investors who own bonds and stocks, commodities can be an ideal way to balance and diversify. It’s true that many raw assets, like steel, crude oil, coffee, and gold, can rise in price when the overall securities markets decline and offer fewer opportunities. It’s common to read financial news stories about people who use gold as a hedge against inflation. In fact, there are dozens of commodities that can do the very same thing for a portfolio during times of economic uncertainty and general volatility.
Using leveraged buying power to take advantage of the current upswing in the commodities markets is something that even new investors can take part in, as long as they’re informed and understand how to place orders with confidence.
