Stock prices are falling and the market is turning to bear territory.
Bond prices also fell sharply. Foreign currencies are weakening against the dollar. Cryptocurrencies, special purpose vehicles, and other speculative assets are collapsing. Exchange-traded goods are enjoying success at the same time. Bloomberg’s Commodity Spot Index is up 33% this year, with energy, metals, and agricultural prices rising sharply.
Investors, pressured by accelerating inflation, rising geopolitical risks, and losses from other assets, are turning to exchange-traded funds on commodity exchanges as a way to protect their portfolios. $ 21.4 billion is earmarked for such ETFs by April this year, compared to an outflow of $ 63 billion in the first four months of 2021, according to Morningstar. The enthusiasm of bullish investors towards the commodity exchange may soon cool off against the forces of supply and demand, which seem to soon hit prices.
Covid-19 led to ongoing measures in China, causing a dramatic contraction in production in the world’s second-largest economy, generating about 18.1 percent of global gross domestic product and 23.9 percent of production. The pain has spread to China’s imports of goods, including oil, copper, and iron ore, from countries such as Brazil, Chile, and Australia, as well as manufacturing hubs such as Germany, South Korea, and Taiwan. Chinese imports of iron ore contracted by 13% in April on an annual basis, copper – by 4%, and cars – by 8%, according to Nomura Holdings.
Russia’s invasion of Ukraine has also hit global demand, and the strong dollar has weighed on demand for goods from developing countries, as their currencies have weakened by an average of 3% since April. Of the 45 commodities traded globally, 42 are priced in dollars. The only exceptions are wool (Australian dollars), amber (Russian rubles), and palm oil (Malaysian ringgit). Imports of goods from developing countries have also suffered from a growing need to use their scarce foreign currencies to service dollar-denominated debt. The debt of Chile, outside the banking sector denominated in dollars, increased to 50.3% from 37.4% in Mexico – to 30.1% from 21.9% in Turkey to 28.2% from 23% in the period between 2018 and 2021.
Commodities traded on the stock market are also suffering against the background of economic growth, which prioritizes services over goods. The debt of Americans on spending on goods relative to their income fell from 61% to 35% after World War II, while that on services increased from 38% to 65%. The same goes for developing countries like China.
In terms of supply, except for short periods of growth during the wars and the oil embargo of the 1970s, inflation-adjusted prices have been steadily declining since the mid-1980s by a total of 83%.
The devil is always in the details, but the prices of many agricultural and industrial goods often fall together. For example, a speculator who suffers large losses from zinc positions is forced to sell wheat to save capital.
To be sure, traders need to monitor indicators beyond the economy. Bad weather can affect cereal yields. Cartels can also have an impact. The actions of the Organization of the Petroleum Exporting Countries, for example, are hampering the prospects for higher oil prices. Meanwhile, US shale producers have not responded to high crude oil prices by increasing production.
An example is the honey market – some investors already have short positions in futures, whose prices are down 14% from the peak in early May. Copper is used for almost every commodity – from cars to machines and appliances to computers, so it is a great indicator of a possible recession. In addition, copper has a cartel, neither in terms of supply nor in terms of supply, which can affect the main economic forces. After several grim years, higher copper prices and demand growth projections have encouraged the creation of new mines and increased refining capacity. The International Copper Research Expert Group now expects the refined copper market to report huge surpluses of 328 thousand metric tons this year after a deficit of 475 thousand metric tons in 2021.
Bull-minded investors predict strong demand in the coming years from the market for batteries for electric vehicles and other electrical uses. In the meantime, however, we must recall the forecasts that the growth of electricity supplies will be limited because there is not enough copper on the earth’s surface to make all the necessary wires. Then came silicon fiber, the world’s second most abundant mineral. Traders must rely on human ingenuity, not on price increases caused by shortages.
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