I’ve been thinking about commodities prices this week, in particular metals.
Money is being printed like there is no tomorrow. When I was completing my book, Daylight Robbery, this time last year, US MZM money supply was US$15.5trn (MZM is “money of zero maturity” – a measure of readily available money in an economy held, for example, in cash, current and savings accounts, and money market funds). Yesterday I glanced at the St. Louis Fed website and it was just shy of US$21trn.
That’s extraordinary. Where is all this inflation going to end?
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Usually, inflation is good for metals. But no two inflations are the same in this modern age of funny money. Economists can’t even agree what the word means.
First, make sure you hold independent money
In this case, for example, these Federal Reserve injections that show up on MZM have been “offset” by the collapse of dollar liquidity offshore. Money velocity is down. Or to use layman’s terms the deflationary tsunami that was Covid has hit an inflationary wall of central bank printing.
None of this answers the question, however: where will it all end?
Independent money and tech have been my two big themes, and they remain so. By independent money I mean gold and bitcoin.
Gold is having a bit of a breather and over the last few days has retreated a little. You should always have some gold in your portfolio by my reckoning. With any pretence of fiscal or monetary rectitude in national currencies long since abandoned, the case for it is stronger than ever. Fiat money is not a store of wealth. Gold is.
Bitcoin, meanwhile, is similarly impossible to debase. With so much potential – that, yes, might come to nothing, but then again might not – how can you not own some?
Then there’s tech. Economies might have crashed thanks to Covid, but tech has come to the rescue. And my gosh has it stepped up to the plate. Whether it’s Google, Netflix, Twitter, Facebook – from Amazon to Zoom, with every letter in between – we are using tech more than ever it seems. That’s why the Nasdaq is hitting all-time highs.
I don’t see any reason to change those particular themes, but they are feeling a little tired. Perhaps it’s time for some sector rotation.
Markets often move in cycles, and it can often pay to be in different sectors at different times in the cycle. When the shops open again, should you move out of Amazon, perhaps, and into traditional retail? As Covid passes, should you move out of healthcare into, say, leisure?
These are all questions that people are trying to figure out. 2020 has been so extraordinary, nobody quite knows what is going to happen next. Everybody is second-guessing everybody else, and theories abound.
The global reflation programme will boost base metals
With this in mind, is it time to be moving out of gold and into base metals? The case for base metals is surely reflation. Governments borrow and print to pay for infrastructure projects. This translates into greater demand for the likes of copper, zinc, iron ore, nickel and aluminium.
On the other side of the coin, supply of these metals is short. Copper, for example, has been in a secular bear market for nine years. It enjoyed a two-year 50% rally in 2016-2017 at the prospect of a Trump infrastructure spend, but the bigger picture is year after year of relentless bear market. In 2011 the high was north of $4.50/lb and here we are today at $2.40.
Nobody likes nine years of bear market, but, on the other hand, there is nothing like a bear market to get you tightening your belt. Mining is a lot less flabby than it was nine years ago. The capital hasn’t been there, so it’s only the better operations that have survived. The result is that at an operational level the industry is working a lot more efficiently than it was in 2011. Personnel, practice, performance – it’s all better.
It’s far from perfect – it’s mining, after all. But it’s a lot better than it was.
But that belt tightening also means that supply is constrained, and can’t meet the demands of a global government reflation programme. That will put upwards pressure on prices.
Copper in particular looks promising
Meanwhile thanks to Covid many mines had to close temporarily and mine supply is constrained. South America, in particular, is struggling – Peru especially – and the west of the continent is the source of much of the world’s copper.
I read a very bullish note from Canadian investment house, Canaccord, last night, which noted that total global copper inventories (including bonded warehouse deliveries) are 749,000 tonnes. This is down 22% from March and down 29% year-over-year.
Scrap copper, which accounts for 20% of global supply, is also tight. Andy Home of Bloomberg calls scrap “the hidden balancer of the copper market”. When there is oversupply of copper and low prices, scrap availability reduces. Thus does demand for primary copper increase.
But Covid-19 lockdowns have frozen collection networks and trade flow. In short, a key supply source that balances the market and has nearly been shut off. That won’t last of course. It never does. But for now it is putting upwards pressure on prices.
Meanwhile copper cathode premiums in China are above $100/tonne, when a $60-$80/tonne premium would be considered normal. This signals strong demand pull with the result that there is a price arbitrage between Shanghai and London.
Inventories in Shanghai are down 16% week-on-week suggesting there is robust domestic demand.
Finally, in early May, a survey by the Shanghai metals market of Chinese copper wire and cable fabricators showed that operating rates are now over 100% of nameplate capacity for the first time ever. The rise is due to orders from the country’s State Grid Corporation, which has been given a large budget increase this year.
Similar dynamics have driven previous bull markets. Perhaps it’s time to rotate into copper to play the great reflation.
There’s no shortage of copper miners on the LSE if you fancy playing this theme. Among them BHP Billiton (LSE: BHP), Anglo American (LSE: AAL), Antofagasta (LSE: ANTO), Rio Tinto (LSE: RIO) and Glencore (LSE: GLEN).
Full disclosure: I own BHP.
Until next time,
Dominic is the author of Daylight Robbery – How Tax Shaped The Past And Will Change The Future, available at Amazon and all good bookstores. The audiobook, read by Dominic, is available on Audible and elsewhere. If you would like a signed copy, you can order one here
Dominic Frisby (“mercurially witty” – the Spectator) is the world’s only financial writer and comedian. He is MoneyWeek’s main commentator on gold, commodities, currencies and cryptocurrencies. He is the author of the books Bitcoin: the Future of Money? and Life After The State. He also co-wrote the documentary Four Horsemen, and presents the chat show, Stuff That Interests Me.
His show 2016 Let’s Talk About Tax was a huge hit at the Edinburgh Festival and Penguin Random House have since commissioned him to write a book on the subject – Daylight Robbery – the past, present and future of tax will be published later this year. His 2018 Edinburgh Festival show, Dominic Frisby's Financial Gameshow, won rave reviews. Dominic was educated at St Paul's School, Manchester University and the Webber-Douglas Academy Of Dramatic Art.
You can follow him on Twitter @dominicfrisby
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