- Gold, copper, oil and cocoa are seeing strong gains amid broader moves across the commodity sector.
- The rally is delivering historic gains for the commodity trading industry.
- Traders said raw material shortages and macroeconomic uncertainties were the main reasons behind the rise in commodity prices.
All that glitters is not gold, as other ingredients glitter as well.
Darrell Martin, CEO of Apex Trader Funding, told Business Insider that commodities trading has been booming in recent months, with prices of everything from industrial metals to oil rising.
“The market volatility created by these big moves is creating a lot of opportunities,” he said. “We're seeing more volatility during the day, which is great for traders. Traders are getting a lot of opportunities to get in and make money this way.”
Supporting the stock rally has been a strong rally in a range of real assets, with the commodity-based S&P GSCI up 12.8% this year, comfortably outpacing the 7% gain in the S&P 500. This has sparked the most profitable period in commodity trading history, with the top four private trading firms set to make $50 billion in profits since 2022, according to Bloomberg.
“This is a classic late-cycle rally in commodities,” Carlyle's Jeff Currie told CNBC on Wednesday. “When you look at global growth, industrial production is bottoming out and starting to trend upwards, which reflects low inventories and not a lot of spare capacity.”
Market experts say there are two key themes behind the surge in commodity prices.
inventory shortage
Supply shortages are a central factor behind rising prices of commodities such as copper and cocoa.
“The copper supply crisis has arrived,” Bank of America headlined its report on Monday. “Copper mine supply shortages are increasingly constraining refined production as a hotly debated lack of mining projects finally begins to have an impact.”
The bank said gold prices are expected to reach $5.44 per pound by 2026, up 27% from the current price of $4.28 per pound.
Copper prices are up 11.6% so far this year, a rally that Currie and Martin link to a rebound in production after the pandemic, but in Bank of America's view, copper is also at the epicenter of the energy transition and will further benefit from the expansion of artificial intelligence data centers.
Cocoa is no different, with drought and poor harvests driving raw material prices to record highs. Over the past 12 months, cocoa futures have risen 256% to a record $10,900 a tonne.
While this may seem like an unfortunate turn of events for producing countries, climate change could lead to future agricultural shortages, as The Wall Street Journal recently noted. Coffee beans could suffer the same fate, and prices for the commodity have already skyrocketed this year.
Global Uncertainty
The supply and demand imbalance also extends to crude oil, but the unstable macroeconomic outlook is another factor shaping the momentum of crude oil and gold.
Gold has surged nearly 15% so far this year, but some of that success can be attributed to 2023's underperformance, Martin said.
“Gold is always lagging behind, and then when it finally rises, it jumps big.”Gold hit a new all-time high of $2,424 an ounce on Friday.
Rising inflation, massive central bank purchases, and geopolitical turmoil have all boosted gold's safe-haven value, which is why Martin expects the price of gold to quadruple within the next three to five years.
Other predictions are less bold, but analysts such as Ed Yardeni and David Rosenberg expect oil prices to rise by 50% and 30%, respectively, over the next few years, with Yardeni also predicting that an escalation in the Middle East conflict could send Brent crude to $100 a barrel.
2024 is a boon for commodity traders, but some are warning of the macro implications of rising prices. Market experts say rising commodity prices could lead to a new spike in inflation, weakening the chances of the Federal Reserve shifting interest rates.
“If interest rates fall, [commodities] “Interest rates are going up, but we're not going to cut rates just because commodity prices are rising,” Currie said. “So from a commodity perspective, this is a win, and for that very reason, it goes back to my contention that commodities are always the best investment to make at this point in the economic cycle.”
