The case for rising inflation and it's implications on commodity markets
(Kitco News) - I am going to lay out the case for problematic price inflation impacting global economies in the coming months/years, and as soon as late-2021. I studied economics in college and one of the primary elements of the study is monetary policy. Increasing the money supply and the velocity of money in financial systems is generally an effort by central bankers to stimulate more demand for goods and services—ultimately growing the economy or at least keeping it from stagnating. However, an economy that is running too hot (strong consumer and commercial demand for goods and services) runs the risk of problematic price inflation. Reason: Stronger demand for products can create shortages, prompting the producers of the products to raise prices, as they scramble to hire more workers to produce the products—including offering higher wages to get the workers on board. Product shortages can prompt even higher demand as end-users then want more stockpiles of products to keep on hand (hoarding).
The U.S. and world economies at present are in varying degrees of recovery from the pandemic-inflicted damage created over the past year. Most agree that by later in 2021 major economies will be well on the road to recovery. This is due in part to the massive influx of monetary stimulus injected into global financial systems that kept major economies afloat during the pandemic.
The combination of stronger global consumer demand later this year, amid lots of liquidity in major financial systems, certainly appears to set the table for very strong consumer demand once the pandemic is tamped down. Consumers with access to easy money, via the stimulus packages and very low interest rates, are likely to come out of the pandemic with voracious appetites for all kinds of products—many of which will likely become in short supply.
Raw commodity markets are already experiencing some inflation, as their futures markets have recently hit multi-month or multi-year highs, including metals, grains and crude oil. Following are some weekly charts for mostly futures markets, many of which are already suggesting rising inflationary pressures in the coming months, or longer.
We’ll start out with the Goldman Sachs Commodity Index, which is a basket of major futures markets rolled into one composite index. See that the GSCI is in a steep price uptrend and has just hit a 2.5-year high. The index has just moved to about the mid-point of its trading range of the past several years, suggesting there is still a lot more room to move to the upside for the index.
Nymex crude oil prices are arguably the leader of the raw commodity sector and this market just this week hit a 13-month high above $60.00 a barrel. Six months ago, during the depths of the pandemic, very few if any oil analysts were reckoning this kind of strong recovery in oil prices, so soon.
Comex gold futures have been trending lower since the August record high of $2,063.00, basis nearby futures. However, it can still be argued the gold prices remain in a longer-term uptrend. Still, the gold bulls need to step up and show the power to defend what is now the last “reaction low” in the uptrend on the weekly chart, located at the November low of $1,762.30. History shows that metals prices perform well during times of rising inflation, as hard assets (commodities) are in favor over paper assets (stocks and bonds).
U.S. T-Notes: Yields on U.S. 10-year Treasury notes this week hit a 12-month high of around 1.3%. (Yields move in the opposite direction as Treasury prices.) See on the weekly chart for nearby T-Note futures that a long-term price uptrend has stalled out and that prices are starting to trend down. Rising yields in bond markets are yet another clue of rising interest rates and increasing inflation. However, present bond yields and interest rates are not even close to being problematic, and in fact the Federal Reserve would like to see U.S. interest rates around the 2% annual level, or just a bit above that.
The U.S. dollar index is a basket of six major world currencies stacked up against the U.S. dollar. See on the weekly USDX chart that despite the recent rebound in the greenback, prices are still in a steep longer-term downtrend. The devaluation of the U.S. dollar on the foreign exchange market also argues for higher inflationary price pressures, given that the dollar is still the world’s reserve currency and that most commodities on the world market are priced in U.S. dollars—making then cheaper to purchase in non-U.S. currency. Read that as better demand for those commodities.