The world’s largest hedge funds are betting that the prices for industrial commodities will start to rise, and quickly, by the end of the year. This includes iron ore, copper, aluminum and most of the rarer elements. The only thing they see tanking will be gold, as they have concluded that this is a metal that has been far overpriced as people flee other investment options.
The rationale is that there will be a significant level of global economic recovery to stimulate demand for commodities that many operations have elected to slow production of. The low prices of copper shoved some of the bigger producers into limiting capacity. The same process has been at work with aluminum. Steel demand is still far below what it was a few years ago, but it has been in recovery as there has been more life in the automotive sector as well as in mining equipment and agricultural equipment.
Analysis: In this scenario, the manufacturer faces a dilemma. If they do not lock down supply now, they face the threat of higher prices. If too many elect to buy now, the supply issues will occur that much sooner, and the prices will escalate. If the producers respond to these high prices, they will up their output and the commodities hit the market before there is real demand. Then, there is then the possibility of a glut that pushes the prices back down—just as the real demand starts up, and those who waited get the best deal.
Chris Kuehl, PhD, NACM Economist