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Turner's Take Ag Marketing | Commodity Inflation

By: Craig Turner, Senior Risk Management Consultant

Commodity Inflation
 
Craig Turner
Senior Risk Management Consultant
craig.turner@stonex.com

Commodity Inflation

Below is a chart for commodity price percent change from March 1, 2020 to Sept 30, 2021.  Clearly we have seen significant inflation over the past 18 months.  Part of the inflation has to do with supply shortages driving prices higher. Some of the inflation can be accounted for prices being historically low in March of 2020.  The other major factor is the supportive policies of the Federal Reserve, US government, and central banks/nations around the world.  

Palladium is down 24% and the only big loser since the start of the pandemic. Demand for palladium is lower than normal due to lower production of new cars.  There is micro chip shortage and that is impacting new car production.  If manufacturers can't get the chips to produce new cars, then they don't need palladium.  

Natural Gas has gained the most since the pandemic.  Production cuts due to COVID restrictions, less investment in traditional energy sources, coal demand switching to natural gas demand, and lower supplies globally have contributed to the rally.  

I think the main takeaway is shutdowns have lead to production and supply chain issues.  The second chart below is for the Baltic Dry Index, which tracks shipping costs.  Shipping has more than doubled and those prices get pasted along to the consumer.  The world needs to get back on track for production of commodities, manufacturing, transportation, and other sectors of the goods and services industry.  I don't know if prices can go back to 2019 levels but increased production can go a long way in bringing a lot of these costs lower.

Gold, Silver and Bitcoin

Back in 2008 I wrote a blog post titled "The Value of Gold."  This was after Lehman collapsed and we were still dealing with the fallout from the subprime crisis.  I thought about it after looking the inflation graph above.  Gold is only up 11%. Gold is primarily a store of value precious metal and always has been known as a safe haven for inflation and economic uncertainty. Silver is up 32%.  Silver is a precious metal but it is also an industrial metal.  You can make the argument the silver rally is more about shortages for production rather than it's precious metal value.  

The Value of Gold by Craig Turner (2008)

I was thinking about this because since March 1, 2020 bitcoin has gone from $8,000 to $50,000.  That is an increase of over 500%.  One of the points I make in the linked article in the Value of Gold, is that it is a psychological market.  Gold can be a currency between central banks and nations, but for corporations and individuals it is a very inefficient form of currency. Gold by itself is a soft metal used for jewelry with no real application for manufacturing and industrial use.  If the world finds a better store of value, then what is the Value of Gold?  That is what was on my mind in 2008.

Here were are in 2021 and cryptocurrencies have become the investment of choice for inflation and hedging systemic risk.  I think the money that would have normally flowed into gold and silver is now flowing into cryptos.  Once again I find myself asking the same questions but instead about gold is it now about the value of crypto. Is crypto a phycological market or a real currency?  It is a hybrid of both like gold?

Time will tell how this all turns out.  I think it is all a good reminder that investors and traders should have diversification and commodities should be a healthy part of that diversification.  Maybe we'll see a "Value of Crypto" report from yours truly in 2022.  As always, stay tuned!

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