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What is driving a potential commodities supercycle?

The commodities supercycle is underway. That is, according to Goldman Sachs and S&P Global. Commodity prices have already swung up as the world economy recovered from the pandemic and more is yet to come.

There are three key factors driving the commodities bull-run now and into 2021.

China

China is the leading consumer of a number of commodities, and with its ever-growing economic power, its demand is increasing. This phenomenon is responsible for pushing the price of a range of commodities to record-breaking levels in recent times. 

China’s impressive recovery from the coronavirus pandemic is set to continue into 2021. The World Bank has forecasted a 7.9% growth rate for the country this year which means more demand for commodities and a surge in price.

US dollar inflation

Inflationary fiscal and monetary policies at an unprecedented level could contribute to a long-term rise in commodity prices. Long-term bond yields reached their highest level in thirty years this month in a sign that investors are expecting oncoming inflation. In this case investors are drawn towards commodities, such as precious metals or oil, which they deem a safe haven for investments during inflationary periods. 

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Furthermore, as the US dollar is the world’s benchmark currency, it is used to price many commodities. A weaker dollar means lower prices for commodities. “The only way to get commodities moving in an inflationary, buying power way is a weaker dollar,” said Doug King, head of RCMA’s Merchant Commodity Fund.

Transition to green energy

Governments across the world are increasingly committed to green policies as they seek a way forward from the coronavirus pandemic. Accordingly, investors are turning away from fossils fuels and looking towards clean energy solutions. This means higher demand for the commodities involved in producing these new technologies. An example is the use of copper in the manufacturing process of electric cars. 

Mark Lewis, chief sustainability strategist at BNP Paribas Asset Management, said: “I’ve been in financial markets for 30 years now and I have never seen anything like it. It feels like any market you look at, investors want to buy.

The next three decades are “likely to bring a supercycle in investments in clean energy infrastructure, clean transportation and everything else that is required to make the green transition possible”, he said.

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