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Economist predicts ‘super bull’ phase for global commodity prices

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By Maja Garaca Djurdjevic
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4 minute read

An economist believes commodities have passed the trough of their cycle and are entering a new, more bullish phase.

Global commodity prices are on an upswing, according to Paul Bloxham, chief economist at HSBC.

HSBC’s statistical model, COCCLES, indicates an increased probability of shifting from a “weak bull” to a “super bull” phase, despite high starting nominal prices.

The Bloomberg spot price index for commodity prices has risen by 11 per cent year-to-date, reflecting a broad-based pick-up, covering commodities like copper, gold, cocoa, and coffee. The trough in the index, in mid-February, was 41 per cent above its 2015–19 average, and the index is now 60 per cent above that average.

“The commodity index appears to be in an upswing,” said Bloxham, indicating several factors are contributing to this surge, including rising demand and supply-side constraints.

“Demand indicators have started to pick up as the global industrial cycle is turning more positive. Copper prices, which are often seen as a timely indicator of the industrial cycle, have picked strongly,” the economist said.

“The supply-side for commodity markets is constrained by persistent factors – including geopolitics, climate change and the energy transition – in what we have been calling a ’super-squeeze’.”

Although nominal commodity prices are high, Bloxham pointed out that in real terms – relative to the US Consumer Price Index (CPI) – commodity prices are around their historical average, meaning that commodities have maintained their value compared to other goods and services.

Breaking this down a bit further, Bloxham explained the recent surge in CPI inflation means that US dollars now buy fewer goods and services, but commodities have retained their purchasing power.

“Because we have not had high inflation for many decades, the effect is quite unfamiliar,” he said.

“But here’s the kicker. Because central banks target inflation, not the price level, it seems unlikely that the price level will return back to down to its previous trend any time soon. Commodity prices too may therefore stay at a new higher nominal level,” Bloxham added.

Expounding on gold, he said gold prices have reached new all-time highs in nominal terms and remain above average in real terms. As a store of value and a hedge against inflation, gold has outperformed the broader commodities basket in maintaining real value.

Looking ahead, Bloxham said sustained high commodity prices have different implications compared to the early-2000s’ China-demand-driven “super-cycle”. According to him, the current dynamics are primarily due to supply squeezes and a higher general price level.

In addition, he noted, the general price level is now higher than it was – so commodity prices may also stay higher than they were as relative prices matter.

“Different drivers mean different implications for growth, inflation and interest rates. As we have noted before, if commodity prices stay high, they are likely to contribute to the ’sticky’ inflation challenge.”

In a recent note, AMP’s Shane Oliver examined the surge in both gold and metal prices, noting that gold has surged 19 per cent over the past year, while copper has risen by 35 per cent.

While Oliver noted that several factors have driven the surge in gold prices, including Chinese official buying to diversify reserves away from US dollars, increased Chinese retail demand, and safe-haven buying due to geopolitical risks, he emphasised that the rally in gold is not occurring in isolation.

“If gold was just going up on its own it may be more concerning from a geopolitical perspective. But it’s also gone up with shares over the last year suggesting that its benefitting from the broader anticipation of lower interest rates ahead which lowers the opportunity cost of holding gold and pushes it higher – and had setbacks with shares whenever expectations around rate cuts have been questioned – like into last October, in April this year and over the last week,” Oliver said.

“It’s a similar story with bitcoin. That the surge in the gold price has occurred at the same time as a surge in copper prices and metal prices generally is also consistent with the view that its being helped by the anticipation of lower interest rates.”

Turning to the strength in metal prices, he said it too is consistent with the nascent rebound in Chinese shares suggesting a potentially better outlook for Chinese growth on the back of increasing government stimulus measures.

Ultimately, Oliver said if gold and metals have further to go, it’s a positive sign for the Australian dollar and Australian resources shares.