It is official- Inflation is no longer “transitory,” according to the US central bank. After blaming rising prices on pandemic-inspired supply chain bottlenecks throughout 2021, the Federal Reserve swallowed its pride, admitting inflationary pressures are far more structural than “transitory.” Economist Mohamed El Erian called “transitory” the worst call in the Fed’s history.
What the Fed, US Treasury, and most mainstream economists have not said is that the blame lies at their feet. The liquidity tidal wave and stimulus tsunami lit the inflationary fuse in 2020 that continues to burn in early 2022.
The dollar index may have rallied by 6.34% in 2021, but its appreciation is little more than a mirage. The foreign exchange market conveniently measures one currency’s value against another. The dollar’s ascent may make the greenback the strongest fiat currency, but it is the best horse in the glue factor when it comes to value. All fiats have lost purchasing power since 2020, and the dollar is no exception. The stock market, real estate prices, cryptocurrencies, and commodities have all experienced substantial price appreciation, which is also a mirage. Fiat currency’s purchasing power continues to decline, and that trend remains firmly intact as we head into 2022.
Commodity prices began rallying after reaching bottoms in early 2020 as the pandemic swept across the world. The rally continued in 2021 and looks set to take prices to higher lows and higher highs in 2022.
2021 was a very bullish year in the commodities asset class
A composite of 29 of the leading and most liquid commodities futures and forwards that trade on the US and UK futures and forwards exchange moved 4.73% higher in Q4 2021 and 26.79% higher in 2021. In Q4, the leading sectors posted the following results:
In 2021, four of the five sectors posted double-digit percentage gains while only precious metals moved lower:
The overall performance was highly bullish as inflationary pressure, pandemic-inspired supply chain bottlenecks, and other factors pushed prices to multi-year, or in some cases, new all-time highs.
An interesting observation between a commodity composite and the S&P 500
In a sign that inflation pushed all asset prices higher, the performance of the leading stock market index and commodities asset class was virtually the same.
The long-term chart of the S&P 500, the most representative stock market index, reflects a 26.89% rise in 2021.
The commodity composite that includes the leading precious and base metals, energy, soft, gains, and animal protein markets was 26.79% higher. The results are uncanny but reflect inflation’s impact on prices.
Thirty-three winners and eight losers for the year
Winners outnumbered losers by better than four-to-one in the commodities asset class that includes 41 different markets.
Metals, foods, and energy commodities posted the most significant gains. Thirty-two of thirty-three markets that moved higher posted double-digit percentage gains, and thirteen markets were up over 50%.
Of the eight markets that moved lower in 2021, five were precious metals. The sector may have lost 11.91% in 2021, but it moved 27.85% higher in 2020. Gold reached a new all-time high in 2020 and palladium in 2021, before the shiny metals corrected. Iron ore, the worst-performing commodity in 2021, was nearly 73% higher in 2020. Soybean meal rose by over 43% in 2020. Cocoa posted a marginal gain in 2020 and a market loss in 2021.
Three reasons the bullish relay race will continue
The ascent of commodity prices since the 2020 lows has been nothing short of a bullish relay race, with one market handing the bullish baton to the next.
Three factors favor a continuation of bullish price action in 2022:
Inflation: The Fed may be talking a hawkish game in early 2022, but action speaks a lot louder than words. At the December FOMC meeting, the committee forecast a 0.60% Fed Funds rate in 2022 and a 1.90% short-term rate in 2023. Even if inflationary pressures recede, real interest rates will remain in negative territory, which is fuel for higher inflation. As fiat currencies’ purchasing power declines, commodity prices are likely to continue to make higher lows and higher highs.
The supply chain: Geopolitical issues and the pandemic’s legacy continue to create bottlenecks preventing commodities from moving from producers to consumers. Moreover, tensions between the US and Russia and the US and China develop roadblocks for commodities and distort prices, creating gluts in some regions and shortages in other areas.
Policy: The shift in US energy policy to address climate change changed the fundamental equation for fossil fuels. OPEC and Russia now control world petroleum pricing. Increased regulations on US drilling and fracking will weigh on supplies. Moreover, addressing climate change dramatically increases the demand for battery metals and other commodities that are critical inputs for greener energy via alternative and renewable sources. Energy is an essential input for all commodity production. As energy prices rise, it puts upside pressure on all commodities, including grains, animal proteins, and metals.
Inflation is a vicious cycle that is challenging to address once it gains speed. The US Fed and other world central banks are far behind the inflationary curve in early 2022.
Bull markets rarely move in straight lines
Bull markets can experience brutal corrections. In 2021, we saw copper drop from a new record high at nearly $4.90 per pound in May to below $4 in August. Lumber dropped from over $1700 per 1,000 board feet in May, a record high, to under $500 in August. Crude oil fell from its highest price since 2014 at $85.41 in October to below $63 in early December. Natural gas tanked from $6.466 per MMBtu in early October to below $4 in December and January. Many other commodities suffered equally ugly corrections. However, most found bottoms and have rallied from the higher lows than in 2020.
I expect a continuation of higher lows and higher highs in the commodities asset class in 2022. The trend is always your best friend, and it remains higher in the raw materials asset class since 2020.
2021 was a bullish year in commodities, and I expect that trend to continue in 2022, but the road to higher prices is likely to be very bumpy.
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Trading advice given in this communication, if any, is based on information taken from trades and statistical services and other sources that we believe are reliable. The author does not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects the author’s good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice the author provides will result in profitable trades. There is risk of loss in all futures and options trading. Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This article does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.
What the Fed, US Treasury, and most mainstream economists have not said is that the blame lies at their feet. The liquidity tidal wave and stimulus tsunami lit the inflationary fuse in 2020 that continues to burn in early 2022.
The dollar index may have rallied by 6.34% in 2021, but its appreciation is little more than a mirage. The foreign exchange market conveniently measures one currency’s value against another. The dollar’s ascent may make the greenback the strongest fiat currency, but it is the best horse in the glue factor when it comes to value. All fiats have lost purchasing power since 2020, and the dollar is no exception. The stock market, real estate prices, cryptocurrencies, and commodities have all experienced substantial price appreciation, which is also a mirage. Fiat currency’s purchasing power continues to decline, and that trend remains firmly intact as we head into 2022.
Commodity prices began rallying after reaching bottoms in early 2020 as the pandemic swept across the world. The rally continued in 2021 and looks set to take prices to higher lows and higher highs in 2022.
2021 was a very bullish year in the commodities asset class
A composite of 29 of the leading and most liquid commodities futures and forwards that trade on the US and UK futures and forwards exchange moved 4.73% higher in Q4 2021 and 26.79% higher in 2021. In Q4, the leading sectors posted the following results:
- Base metals moved 9.65% higher
- Grains gained 9.31%
- Animal proteins moved 4.73% higher
- Soft commodities appreciated by 4.25%
- Precious metals posted a 2.80% gain
- Energy commodities fell 3.02%
In 2021, four of the five sectors posted double-digit percentage gains while only precious metals moved lower:
- Energy was 54.13% higher
- Base metals gained 38.09%
- Soft commodities rallied 31.57%
- Grains moved 29.71% to the upside
- Animal proteins appreciated by 19.16%
- Precious metals fell 11.91%
The overall performance was highly bullish as inflationary pressure, pandemic-inspired supply chain bottlenecks, and other factors pushed prices to multi-year, or in some cases, new all-time highs.
An interesting observation between a commodity composite and the S&P 500
In a sign that inflation pushed all asset prices higher, the performance of the leading stock market index and commodities asset class was virtually the same.
The long-term chart of the S&P 500, the most representative stock market index, reflects a 26.89% rise in 2021.
The commodity composite that includes the leading precious and base metals, energy, soft, gains, and animal protein markets was 26.79% higher. The results are uncanny but reflect inflation’s impact on prices.
Thirty-three winners and eight losers for the year
Winners outnumbered losers by better than four-to-one in the commodities asset class that includes 41 different markets.
Metals, foods, and energy commodities posted the most significant gains. Thirty-two of thirty-three markets that moved higher posted double-digit percentage gains, and thirteen markets were up over 50%.
Of the eight markets that moved lower in 2021, five were precious metals. The sector may have lost 11.91% in 2021, but it moved 27.85% higher in 2020. Gold reached a new all-time high in 2020 and palladium in 2021, before the shiny metals corrected. Iron ore, the worst-performing commodity in 2021, was nearly 73% higher in 2020. Soybean meal rose by over 43% in 2020. Cocoa posted a marginal gain in 2020 and a market loss in 2021.
Three reasons the bullish relay race will continue
The ascent of commodity prices since the 2020 lows has been nothing short of a bullish relay race, with one market handing the bullish baton to the next.
Three factors favor a continuation of bullish price action in 2022:
Inflation: The Fed may be talking a hawkish game in early 2022, but action speaks a lot louder than words. At the December FOMC meeting, the committee forecast a 0.60% Fed Funds rate in 2022 and a 1.90% short-term rate in 2023. Even if inflationary pressures recede, real interest rates will remain in negative territory, which is fuel for higher inflation. As fiat currencies’ purchasing power declines, commodity prices are likely to continue to make higher lows and higher highs.
The supply chain: Geopolitical issues and the pandemic’s legacy continue to create bottlenecks preventing commodities from moving from producers to consumers. Moreover, tensions between the US and Russia and the US and China develop roadblocks for commodities and distort prices, creating gluts in some regions and shortages in other areas.
Policy: The shift in US energy policy to address climate change changed the fundamental equation for fossil fuels. OPEC and Russia now control world petroleum pricing. Increased regulations on US drilling and fracking will weigh on supplies. Moreover, addressing climate change dramatically increases the demand for battery metals and other commodities that are critical inputs for greener energy via alternative and renewable sources. Energy is an essential input for all commodity production. As energy prices rise, it puts upside pressure on all commodities, including grains, animal proteins, and metals.
Inflation is a vicious cycle that is challenging to address once it gains speed. The US Fed and other world central banks are far behind the inflationary curve in early 2022.
Bull markets rarely move in straight lines
Bull markets can experience brutal corrections. In 2021, we saw copper drop from a new record high at nearly $4.90 per pound in May to below $4 in August. Lumber dropped from over $1700 per 1,000 board feet in May, a record high, to under $500 in August. Crude oil fell from its highest price since 2014 at $85.41 in October to below $63 in early December. Natural gas tanked from $6.466 per MMBtu in early October to below $4 in December and January. Many other commodities suffered equally ugly corrections. However, most found bottoms and have rallied from the higher lows than in 2020.
I expect a continuation of higher lows and higher highs in the commodities asset class in 2022. The trend is always your best friend, and it remains higher in the raw materials asset class since 2020.
2021 was a bullish year in commodities, and I expect that trend to continue in 2022, but the road to higher prices is likely to be very bumpy.
--
Trading advice given in this communication, if any, is based on information taken from trades and statistical services and other sources that we believe are reliable. The author does not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects the author’s good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice the author provides will result in profitable trades. There is risk of loss in all futures and options trading. Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This article does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.