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HedgeTalk - Commodities and Metals Commentary

By: Johan Rosenberg, Chairman

Commodities prices were mixed this week and iron ore and aluminum modestly up last week. Then on Monday, the CRB metals index fell 1.4% and the headline CRB commodities index fell 4.0%. WTI Crude gained some ground last week coming off of 18-year lows, only to succumb Monday to something that has never happened before – negative oil prices! Oil futures plunged 276%, to negative $37.63per barrel. Too much is being produced and there is nowhere to put it. Apart from topping off the Strategic Petroleum Reserve and curtailing production, all that the Fed can do is fill up bathtubs and add barrels to its balance sheet. And I suppose you could ask the gas station attendant to pay you to fill up. Gold took a bit of a rest, and its beyond me it isn’t soaring already. In my opinion, gold is going a lot higher and so are commodities generally. Also, some classes of specialized real estate including warehouse and cell tower REITs, and other physical assets are poised for strength, after we’ve sorted out who will pay their rents on time. Gold is 84% correlated with the size of the Fed’s balance sheet and with stimulus like there is no tomorrow, physical assets have nowhere to go but up. This would set up gold to nearly double from current levels. The deficit was already on track for $1.5 trillion, now expanding out to an incredible $4 trillion in less than a month. While there may be no immediate inflation risk, it may very well come back faster than the second wave of the virus; even though, in the near-term, the demand destruction of the lock-down is clearly deflationary. Clear support for prices would be the otherwise irrational stock market reaction to horrible unemployment numbers, which is offset by the massive amounts of stimulus money (PPP and ITS Payments) hitting bank accounts this week. If companies want to win price-wise over the competition, hedging programs will deliver stable prices.


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