Blankfein Called It, Now the Whole World Is Watching Commodities

It was mid-September when Lloyd Blankfein, the former chief executive officer ofGoldman Sachs Group Inc., suggested investing in commodities was “not a bad thing.” Prices for most materials were just off pandemic lows and the asset class was still very much the ugly duckling.

Fast forward four months and commodities are surging. Goldman Sachs,Bank of America Corp. andOspraie Management LLC have all called for a bull market as stimulus kicks in and vaccines help the world emerge from the coronavirus crisis.JPMorgan Chase & Co. has also joined the chorus, advising clients to boost their exposure to materials while reducing investments in bonds.

Commodities haven’t been this sexy since the mid-2000s, when China was stockpiling everything from copper to cotton while crop failures and export bans around the world boosted food prices, eventually toppling governments during the Arab Spring. The backdrop is now starting to look similar, with a broad gauge of commodity prices hitting its highest in six years.

“You have the whole world all of a sudden looking at commodity markets,” said Heber Cardoso, chief commercial officer at HedgePoint Global Markets, the structured commodities unit ofED&F Man Capital Markets that just got bought up by two investment firms. “You have low or negative interest rates fueling inflation, and there are zillions of dollars available looking for returns. There’s a structural change to the way we look at commodities.”

Speculators are now piling in. Hedge fund bets on rising prices are near the highest since at least 2011 and are worth almost $120 billion, according to calculations that include 20 out of 23 materials in the Bloomberg Commodity Index.

It took a while for Wall Street to notice that a commodities bull market was starting to take shape. Calls for a rally came mostly at the end of the year and beginning of 2021, but Blankfein had quietly called it at a Sept. 16 virtual event focused on metals and organized byCME Group Inc.

“From an inflation point of view, as an investor, I think investing in material sectors while they’re under-appreciated is not a bad thing now,” he said at the event. “Everyone has decided that we’ll never have inflationary pressure again, oil prices will never go up again. I don’t think so.”

Since then, the notional value of bullish bets on commodities has jumped by more than $30 billion. Until recently, it had been a corner of the financial markets left for the experts keen on analyzing supply and demand fundamentals.

Agricultural markets have surged more than 30% over the same span, with corn recently hitting a seven-year high, while soybeans and wheat reached the highest since 2014. China is loading up on American crops and Russia, the world’s top wheat exporter, has introduced an export tax that’s double what it had previously planned. Even the beleaguered sugar market has seen prices surge to the highest since 2017.

Copper has faced supply disruptions and the metal could still rally more than 20% and exceed $10,000 a metric tons, said Francisco Blanch, head of global commodities research at Bank of America.

“Copper and some of the industrial metals are facing a different story,” Blanch said on Bloomberg TV Friday. “There’s a structural deficit that is going to be multi-year as we move on to de-carbonize the electricity sector, but also driving.”

The oil market, which was battered by the pandemic that kept cars off the road and grounded planes across the globe, is also witnessing a recovery after vaccines were rolled out and Saudi Arabia decided to cut production for the next two months. Speculators are currently holding the biggest bullish bets on Brent crude in 11 months.

“Oil markets are certainly seeing the most constructive backdrop, both fundamentally and sentiment-wise, in several years,” said Michael Tran, an analyst at RBC Capital Markets. “The vaccine rollout, the potential demand pickup, the Saudi floor in this market, those are all giving investors a degree of comfort.”

A weakening dollar is bringing commodities back just as investors start to wonder how much more could equities surge. Even in emerging markets like Brazil, interest rates are very low and there’s more money available as investors get out of government bonds, said Cardoso of HedgePoint.

“There’s a view that the dollar is going to be, on a long-term basis, quite weak and, with another round of stimulus coming, that we’re going to be in another circumstance in which the Fed is going to have to really work at controlling inflation,” said Tom Finlon of Brownsville GTR LLC, a trading and logistics firm based in Houston. “When the dollar gets cheap, you gotta buy something. That normally begets higher commodity prices.”

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