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JP Morgan's David Kelly talks about a commodities supercycle

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(Kitco News) - In a very interesting and detailed Linkedin post JP Morgan's Chief Global Strategist David Kelly took us through history and explained inflation cycles in a previous era.

Kelly started the post by saying "Memories of the great inflation of the 1970s have faded in the public’s consciousness. Half of today’s population wasn’t even born when inflation stalked the land". He goes on to talk about how far the government can push fiscal spending without igniting significant inflation.

He highlighted "In the 1970s, higher oil prices played a pivotal role in triggering bouts of inflation, boosting the year-over-year increase in the consumer price index to over 12% in 1974 and to almost 15% in 1980.". Kelly deduced that back then "It’s important to recognize that these surges in inflation were just as much about inflation psychology as inflation itself." a very interesting concept indeed. He explained that the issues in the middle east sent oil prices spiking and this pushed transport prices higher too. This in turn sent agriculture, manufacturing and transportation costs through the roof. Then wages needed to rise because the labour force needed to be able to afford food and petrol. As companies could not afford to keep paying more unemployment moved into double digits in the States.

Moving on to more recent times, Kelly asks if we are in a supercycle. He wrote "Data last week confirmed that the economy is now accelerating fast, with retail sales climbing by an astonishing 9.8% in March, housing starts hitting a nearly 15-year high and weekly initial unemployment claims falling to their lowest level in over a year. This acceleration is causing many to ask questions about the potential for higher inflation and some have even speculated on a new commodity “super-cycle”.

Some of the conditions for higher inflation have clearly returned. Massive fiscal and monetary stimulus have been deployed during the pandemic recession and neither the Federal Government nor the Federal Reserve are showing any signs of turning off the spigot even as the economy quickly recovers, said Kelly.

There may not be the same inflation issues as there was in the past as the OPEC+group have the ability to turn on the tap whenever they like. In addition to this, there is also the rise in cleaner energy and lithium, iron ore and zinc prices could be in more focus than they ever have been. This may be the crucial difference between now and then.

Finally, David Kelly then mentions gold. He said "Finally, in the precious metals space, cryptocurrencies appears to be diverting some demand which would normally accrue to gold in a market awash with liquidity. Moreover, while near-zero short-term interest rates are making it easy to finance positions in precious metals, eventual Fed tightening could prove a further headwind in this space as well as for commodities in general.". Longer-term Kelly believes there could be some more pressure on the yellow metal then, could bitcoin's rise be hindering or changing the usual patterns surrounding a commodities supercycle? Only time will tell.


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