A commodities supercycle is building as a sharp economic rebound from the COVID-19 pandemic and President Biden’s climate change fight will fuel higher prices over the next decade, according to J.P. Morgan.
A supercycle is typically an extended period of gains that could run ten years or longer.
Commodity prices have risen sharply from their pandemic lows with the S&P GSCI up 77% from its April 21 low through Thursday.
|GSG||ISHARES S&P GSCI COMMODITY IDX UNITS OF BENEF INTEREST||15.42||-0.40||-2.53%|
West Texas Intermediate crude oil is trading just below $60 per barrel and gold is hovering above $1,800 an ounce as loose monetary and fiscal policy have resulted in pressure on the U.S. dollar and sparked fears of a return of inflation.
|USO||UNITED STATES OIL FUND L.P.||48.05||-0.71||-1.46%|
|GLD||SPDR GOLD SHARES TRUST - EUR ACC||165.95||-5.14||-3.00%|
|UUP||INVESCO DB US DOLLAR INDEX BULLISH FUND - USD ACC||24.74||+0.19||+0.77%|
“Unintended consequences” of President Biden’s environmental policies will also be a catalyst for higher commodity prices, wrote J.P. Morgan quant strategist Marko Kolanovic.
Biden has promised to “transition” the U.S economy away from its reliance on fossil fuels and towards clean energy. Doing so will result in higher prices of metals needed to build out infrastructure and upward pressure on energy prices as supply is constrained.
In particular, Kolanovic says an “oil up cycle” has begun.
There have been four commodities supercycles over the previous 100 years, according to J.P. Morgan. The previous, which was driven by China’s economic boom, had a 12-year up cycle that peaked with the 2008 global financial crisis and was followed by a 12-year down cycle that ended with President Trump’s trade war and the COVID-19 pandemic.
West Texas Intermediate crude oil prices crashing below zero in March of last year was the “watershed event” needed to get investors interested in commodities again, said John LaForge, head of real asset strategy at Wells Fargo, on a call discussing his 2021 outlook. He declared “super bear cycle” over.
In fact, the rest of Wall Street seems to be on board, as well.
Bank of America strategists think the economy’s reopening means the return of human mobility will cause a macro data to surge as pent-up demand is unleashed and inflation shifts from Wall Street to Main Street.
They believe 2020 marked a "secular low” for rates and inflation, and that the current decade will likely see inflation assets outperform deflation assets and real assets outperform financial assets.
Goldman Sachs, meanwhile, said in October that a structural bull market was just getting started. They forecast commodities prices would rise 28% in 2021, led by energy (+43%) and precious metals (+18%).
Since Goldman’s call, WTI crude oil has gained 43% while gold is down 5.2% and silver is up 7.7%.