The commodity cycle is confusing at the moment. Crude oil prices have almost doubled since mid-January 2016. In itself, this is not surprising since fuel prices hit multi-year lows in January 2016. However, the higher prices have sustained after Brexit. There was a six per cent crash immediately after the referendum but prices have since recovered. Base metal prices are also up. Zinc has risen by roughly 30 per cent since January. A rise in base metal prices may be a sign of some sort of revival in global demand. Stabilising fuel prices after Brexit could also mean that traders don't expect a reduction in global fuel demand.
On the other hand, gold prices are up sharply, by 25 per cent. Gold has outperformed most non-precious metals. Bull runs in the yellow metal are generally tied to fears regarding inflation expectations and currency collapses. Gold prices tend to have an inverse relationship to growth. When GDP growth is up, gold prices are usually down. Gold put on a spurt after the referendum so the fear factor has built up.
The crypto-currency Bitcoin is also up by 25 per cent since January. Trading in Bitcoin has been largely driven by Chinese speculators who are using Bitcoin as a means of converting yuan to dollar. Bitcoin is being bought with yuan and then sold for dollar. However, that two-legged trade indicates there is capital flight from China triggered by the currency depreciation that the Bank of China has induced.
Silver is also up substantially. This is interesting because silver prices are often driven by several factors. Silver has some of gold's characteristics in that it's seen as a currency hedge. But, silver is also driven by industrial demand and silver can perform strongly when there's high GDP growth.
There are also major rallies in coffee and sugar. Both rallies have been predicted for a while by commodity analysts. Sugar is being driven by the Indian harvest cycle, as it is usually is. India is the biggest sugar consumer and also a key producer. A low-production season in India usually leads to a global rise in sugar prices. There have been two low seasons in succession. The bull market in coffee is due to global factors. Global demand is up while production has been hit by problems in Brazil, Vietnam and Columbia.
The gradually improving base metal prices seem to reflect some optimism about global growth. This is backed by the recovery in crude prices. But, the rise in gold, silver and Bitcoin also reflects anxieties. Inflationary expectations are not very high, given near-deflationary conditions all around the world. So, we can assume that there are people hedging against currency collapse. The anxiety is global - everybody is buying gold (though China leads). This could be a fallout of the last few years when many central banks have attempted several rounds of competitive devaluation.
How many of the bull-runs mentioned above are sustainable? Some are driven by contradictory rationalisations. If global growth slows down and there is another round of competitive currency devaluation, gold, Bitcoin and maybe silver may uptrend. But, then zinc and copper will correct down and energy fuels should also drop. Alternatively, zinc, copper, crude, etc. will outperform gold if there are genuine prospects of strong growth.
The coffee and sugar rallies will ease off if there are prospects of a good harvest. But, sugar and coffee are both independent of global growth prospects, at least to some extent. Maybe those are worth betting on, precisely because of the lack of linkage with global macroeconomics.
The author is a technical and equity analyst
