Commodities Outperformed During COVID-19 Pandemic

Commodity prices are up sharply during the COVID-19 pandemic. Alternative investments remain attractive in the context of rising inflation.

Commodity prices were severely influenced by monetary and fiscal policy actions during the COVID-19 pandemic. Over last year, natural gas is up 107%, gasoline 78%, and copper 49%, to give only a few examples.

WTI crude oil led the way up. It bounced from negative territory and remained well bid, trading above  $70 and inside a rising channel. The recent push higher above $65 was triggered by the postponing of the nuclear talks between world powers and Iran.

Traders expected a deal to be announced and Iranian oil to reach the market in the third quarter, but now it seems impossible to see it happening until the fourth quarter. The reason is that the Islamic Republic will install its president next month, and now the seventh round of talks is expected to start only in mid-August. Until then, the price of oil remains bid, supported by strong global growth that fuels demand.

Gold – The Outlier

Commodities are alternative investments, and investors use them to hedge against inflation. While corn, coffee, or heating oil, served that purpose, gold failed to do so.

In a context of unusually high inflation in the United States, the price of gold is well below its 2020 highs. And it is not only gold but silver too.

Silver is the only metal that is priced below its 1980 record high. Copper, zinc, tin, aluminium – they all adjusted higher, both in nominal and inflation-adjusted terms.

US Inflation To Be “Exported” to Other Economies

Yesterday’s US inflation data for the month of June revealed that the yearly data reached 5.4%. At the same time, the 10-year bond yields 1.4%, while gold is flat over the last year. Even Bitcoin, viewed by many as the digital gold and the new hedge against inflation, is down 50% from its highs.

In other words, inflation hedging is not as easy as it may seem. Investors struggle to find the right combination of alternative investments to protect portfolios.

Because the US economy is the largest in the world, higher inflation there will spill over to other economies. It already reached the United Kingdom. Earlier today, the yearly CPI in the United Kingdom reached 2.5% on expectations of 2.2% – much higher than the Bank of England’s target.

To sum up, alternative investments remain attractive in the context of higher inflation—commodities, in particular.