The Bloomberg Commodity Spot Index has almost doubled in value over the past year. Some believe the sector may now be overvalued, while others — like well-known analyst Jesse Felder — say the boom could be just beginning.
Despite their terrific run over the past 12 months, commodities prices remain extremely depressed relative to those of financial assets:
Additionally, supply/demand dynamics — especially for battery metals — appear to be improving every day.
Commodities have been in a consolidation phase for well over a decade now. The breakout comes next, Felder says.
“The consolidation phase seen during the 1960s lasted just about as long as the current one; the subsequent breakout higher proved to be a good inflation signal,” he says.
“The next consolidation phase, during the 80s and 90s, lasted more than twice as long as it was marked by a prolonged period of disinflation.”
RIP transitory inflation?
While annual US inflation rose at decade-plus highs through the June quarter, US Fed Chair Jerome Powell remains steadfast in his view that upward pressure on consumer prices will tail off into 2022. Felder disagrees.
A clear breakout higher in the commodities index would probably represent the death knell of the Fed’s ‘transitory’ (short term) narrative regarding inflation — a story investors have bought “hook, line and sinker”, Felder says.
“As such, it could also usher in a wave of investor demand for the sort of inflation protection only commodities can offer,” he says.
“So, it may pay to stay bullish and to keep a close eye on the upper end of that most recent consolidation range.”