(Kitco News) - The commodity market represents the biggest asymmetrical trade in global financial markets, even as gold continues to face significant headwinds from rising inflation pressures and the war in Iran, which continues to create significant funding pressures for emerging markets, according to one famed commodity analyst.
In comments posted on social media Friday, Jeff Currie, Executive Co-Chairman of Abaxx Markets, Senior Advisor at The Carlyle Group, and former head of commodity research at Goldman Sachs, presented a compelling case for why investors should diversify into commodities.
He pointed out that investors have been chasing the AI trade but have largely ignored the physical assets needed to support the evolving technology. Although commodities receive very little attention, he said they have become one of the best-performing asset classes of the decade.
“Get long. Buckle in. Hang on for the ride,” he said.
Currently, the oil market is attracting all the attention in the commodity sector as the war in Iran has created an unprecedented global supply shock, with West Texas Intermediate (WTI) crude oil prices climbing back above $100 a barrel ahead of the weekend.
However, Currie noted that the oil market faces much bigger issues even after the current crisis is resolved.
“Every oil CEO has warned we will exit this disruption with lasting supply problems. The market refuses to listen,” he said.
At the same time, Currie said the supply issues extend far beyond the oil market. He added that this has been the trend since 2020, when he first warned about the beginning of a commodity supercycle.
“In 2020 and 2021, every tech promoter, macro pundit, central banker, and finance guy who has never touched a barrel, a tonne, or a bushel told you there was nothing to worry about. Supply chains were fine. ‘Inflation is transitory.’ The transition was orderly. At the same time, every physical market CEO, every commodity trader, every operator who deals in molecules and electrons told you the opposite. They said capex was collapsing, inventories were thinning, refining capacity was retiring, and mines were closing — at exactly the moment demand was about to break out,” he said. “Today, the same physical market CEOs, traders, and operators are telling you the same thing. The same finance pundits who were wrong in 2020 are telling you to ignore them. Listen to the people who get their hands dirty. They have been right every time.”
While Currie remains a major long-term commodity bull, he said that liquidity needs continue to dominate the short-term environment, which is the biggest reason he has turned bearish on gold.
In the current environment, Currie said he sees gold falling to $4,000 an ounce before rebounding and racing toward $10,000.
He added that the risk is that nations could be forced to monetize their gold reserves to deal with rising inflation and energy costs. Turkey’s central bank has already had to monetize some of its gold to support the lira.
“The Turkish central bank has sold roughly 120 tonnes of gold to defend the lira and fund energy imports. Bernard Dahdah was explicit in April: central banks are now selling gold ‘to defend their currency and/or to fund energy purchases,’” Currie said. “When the marginal central bank flips from structural buyer to forced seller to pay for energy, gold’s biggest bid disappears. Once central banks turn dovish after the energy crisis hits growth, the trade resets and I’m back long.”
Currie’s comments on gold come as the precious metal faces significant selling pressure ahead of the weekend. Spot gold last traded at $4,561.70 an ounce, down nearly 2% on the day. Silver has seen an even sharper selloff, last trading at $76.73 an ounce, down nearly 8% on the day.
The precious metals sector is struggling as investors continue to worry about the opportunity cost of holding non-yielding assets while interest rates could potentially move higher. The ongoing war in Iran continues to support higher oil prices, which are prompting markets to aggressively price in rate hikes by the end of the year.
According to the CME FedWatch Tool, markets see nearly a 50/50 chance of a rate hike by December. A month ago, markets saw only a 1% chance of this scenario.
Despite the potential for higher market volatility, Currie said the commodity supercycle is still in its early innings.
“None of the imbalances have been resolved. They grow by the day. Own the grains/softs. Own the metals. Own the molecules,” he said. “Remember, you cannot print molecules.”
