The Recovery will be Positive for Commodities

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It is a particularly good time to invest in the commodities markets. Global stimulus points to a post-pandemic boom in spending and economic revival. Governments are acting decisively to protect their citizens and businesses from the COVID-19 economic disruption, through tax cuts, investment incentives and helicopter money. Stimulus finances infrastructure, supports businesses and puts money in the pockets of consumers, heightening demand for commodities and the energy required to produce them, while boosting real GDP (figure 1).

Figure 1: Real GDP Growth %

The IMF expects the world economy to expand 6% this year, the fastest in IMF records since 1980i. President Biden’s $1.9 trillion economic package led economists to revise their growth forecasts. Goldman Sachs predicts the U.S. economy will be 8% larger by year end compared to last year, making it the fastest GDP growth since 1965. Goldman’s 2022 growth prediction is 5.1%.ii

Expansionary policy can signal an inflation threat. Since 2008, the Fed has conducted aggressive monetary stimulus in the forms of zero interest rate policy and quantitative easing (QE) which, through the direct purchase of government and other bonds, has injected an unprecedented level of dollar liquidity in the economy. The U.S. monetary base increased from $850 billion in August 2008 to more than $4 trillion by year-end 2014 through three phases of QE. A fourth QE was done after the repo-market collapse in late 2019 and accelerated during the COVID financial crisis, bringing the monetary base to about $5.5 trillion and growingiii (figure 2).

Figure 2: US Monetary Base: Total

Commodity prices typically rise when inflation is accelerating as commodities offer protection from inflation effects. A good inflation indicator is the 10-2 interest rate spread – the difference between the 10-year and the two-year Treasury rates. A positive spread has historically been viewed as a precursor to inflation. The 10-2 spread peaked at 2.91% in 2011 and fell to a low of -2.41% in 1980.iv It has been climbing steadily throughout 2020 and the first quarter of 2021 (Figure 3).

Figure 3: 10-2 Year Interest Rate Spread

Source: Y-Charts