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Copper is widely used in various industrial sectors such as construction, transportation, and telecommunications, making it a reliable early indicator of economic activity.
In fact, "Dr. Copper"'s ability to predict the direction of the global economy earned it a doctorate in economics. When copper prices rise, better manufacturing data usually appears. Vice versa, falling copper prices usually indicate that the economy is slowing down.
Given that copper prices have almost doubled from a year ago, is Dr. Copper correct? Is the demand for industrial metals being driven by increased economic activity, because countries that have been forced to lock down due to COVID-19 have begun to recover with the introduction of vaccines and the lifting of restrictions on social distancing? What about other metals? Does a prosperous commodity complex signal that consumer price inflation may penetrate the wider economy and affect the prices of everyday goods and services?
AOTH's analysis will show that the current monetary stimulus environment and fiscal stimulus in the form of trillions of government expenditures aimed at boosting borrowing and spending, coupled with supply chain disruptions, create perfect conditions for inflation. The average person may not have seen it yet, but it is coming soon. The numbers will not lie.
The data also shows that the Fed is playing down the risk of inflation. This is important for investors to realize this when seeking to understand investment prospects and how to protect their investments.
In the past year, from copper and steel to crude oil, cotton and soybeans, the entire commodity complex has steadily climbed; the Thomson Reuters/Core Commodities (CRB) index has risen by 70% since May last year.
What is behind this overall price increase? In a word: demand. With the largest economies rebounding from the pandemic amidst massive government spending stimulus, manufacturing and construction are picking up, and newly vaccinated people have gone out and are ready to refuel their cars and book flights. As the pig herd recovers from African swine fever, China is buying a record amount of corn, more than three times the tonnage of last year. Grain has become so expensive that it disrupts global trade flows.
Bloomberg pointed out that the current fundamentals of commodities, a cyclical and volatile asset class, are very strong, and prices are showing the most serious discount in 14 years.
According to the news media, commodity futures are usually higher in price over longer periods, but urgent demand has turned about half of the commodities tracked by the Bloomberg Commodity Index (including oil, natural gas, copper, and soybeans) into spot premiums—pointing out this Show how the current supply in these markets is tight.
Highlights include steel, meat, corn, soybeans, wood, iron ore and copper.
In the past year, the cost of corn for livestock has doubled, while the price of soybean meal has risen by more than 40%-meat prices have risen a lot. Due to overcapacity, steel prices, which have been low for many years, rebounded higher due to the surge in demand and China's production cuts. Driven by the lowest interest rate and the shortage of processed timber, demand for housing has soared and timber prices have quadrupled.
Severe weather, including drought, is the chief culprit in the price increase of several agricultural products.
Arabica coffee futures have soared by about one-third in the past year, raw sugar prices have continued to rise, and wheat prices have hit their highest levels since 2013.
According to reports, rising crop prices have aroused concerns about food inflation, as staple foods such as wheat and corn affect the prices of everything from bread and pizza dough to meat and pop music.
(There is usually a time lag before raw food prices rise in grocery stores. Retailers are expected to absorb costs now, but when profits become too thin, they pass them on to consumers.)
At the same time, countries that want to rebuild their infrastructure, such as the US and Joe Biden’s 2.3 trillion U.S. jobs plan, are igniting the fuse of metal commodities and inspiring people’s awareness of new developments that are mainly driven by the so-called green economy. Discussion of the commodity cycle.
According to Bloomberg News, citing the commodity consulting firm CRU Group, President Biden’s large infrastructure expenditures still need to be approved by Congress, which will increase the 80 tons of steel used in the United States each year by 5 million tons, and similar requirements for the use of aluminum and copper.
Not only is copper vital to construction, transportation, and telecommunications, it also plays a key role in the transition to climate-friendly solutions. These include batteries, electric cars, solar panels, wind turbines, connecting renewable energy to the grid, and building 5G networks.
The main factors driving copper prices higher are the strong manufacturing industry and the increase in Chinese orders; expectations of resuming growth after the catastrophic 2020; trillions of promised green and asphalt infrastructure spending, especially in the United States, Europe and China; and Supply disruption caused by virus-related mine closures.
Spot copper has rebounded sharply from the demand shock related to the epidemic in 2020. It recently hit a 10-year high of US$10,000 (US$4.53) per ton, and is currently only one-fifth from the historical peak of US$4.56/lb in 2011.
Bloomberg New Energy Finance said that in 2020, nearly 2 million tons of copper-about 10% of the global mining volume-will be used to build power networks; and it is expected that by 2050, due to the popularization of low-carbon technologies such as solar and electric vehicles, it The application of copper will nearly double.
Anyone who thinks that rapid growth within the commodity industry is temporary is a big mistake.
As the global economic recovery accelerates, forecasters including major banks expect the rebound to continue.
JPMorgan Chase stated that “deflation and reopening of trade will continue,” while UBS expects the entire commodity complex to rise by 10% next year.
One indicator of how metals are currently performing is the profits of the resources industry.
There have been recent reports that due to rising metal prices, the oil company with the highest income in natural resources so far is being eclipsed by its mining counterparts. The top five iron ore companies-BHP Billiton, Rio Tinto, Vale, Anglo American and Fortescue Metals Group-are clearly expected to achieve a combined profit of $65 billion this year, which is approximately more than the five largest oil producers 13%.
The article pointed out that the prices of iron ore, copper and other base metals not only soared, thereby increasing the profitability of miners, but also set off a wave of inflation in the global economy, increasing the cost of everything from wires to construction beams. .
With this thought in mind, I want to correct some of the things I read while researching this very interesting topic. The article pointed out that Dr. Copper told us that money supply inflation will lead to asset price inflation, commodity price inflation, and ultimately consumer price inflation.
In fact, this is not necessarily the case. During the 2008 financial crisis, the central bank tried to restart the economy through quantitative easing and currency printing monetary policies, which led to an increase in the M2 money supply. However, this did not lead to inflation. Why?
The answer is that in 2008, we did not have any expenditure. All stimulus funds stay in the bank. This time is different. Among the US government’s emergency covid-19 measures, there is/is a direct “stimulus”, namely helicopter payments, which are respectively 600 USD, 1,200 USD and 1,400 USD (at different times).
Central bankers have realized that keeping interest rates low and maintaining monthly asset purchases (i.e. quantitative easing) did not bring about the expected economic growth; now they are counting on fiscal policy, i.e. government spending, to solve the problem.
So far, the US government has spent US$4.5 trillion on pandemic-related relief and increased its national debt to US$28 trillion in less than a year. In October 2020, the debt scale exceeded 100% of GDP. This was the first time since World War II, but this was just the beginning. According to the monetary plan already implemented by the Federal Reserve, the money supply will increase by at least another 2.3 trillion US dollars this year.
Therefore, we are carrying out monetary easing while fiscal spending is "fully delegated" (remember, Biden firmly believes that the state has the power to tax and spend. A long wish list is waiting to be filled, and there is almost no worry about the 28 trillion that has been out of control. USD Treasury bonds, provided by Modern Monetary Theory or MMT)
The result of these two forces working together will inevitably cause inflation; in fact, this has already happened, and we can prove it.
In the United States, the annualized GDP growth rate in the first quarter was 6.4%, the second highest quarterly figure since 2003.
The inflation rate in the United States has doubled in a few months and may reach 3% by June. Reuters reported that labor costs in the United States rose 0.9% in the first quarter, further proof that US inflation will rise.
U.S. inflation rate. Source: Trade Economics
Large-scale fiscal stimulus measures, including the trillions of dollars that have been spent on covid-19 relief, the $2.3 trillion infrastructure bill proposed by President Biden, and the $1.8B education and health care plan. The large amount of funding dwarfs anything that was even considered in the 1970s when the nations of the United States suffered the last major inflation.
In addition, it is exciting that Americans are finally able to get rid of the shackles of the new crown virus, spending the money they saved last year and restarting wages. Therefore, demand may soar.
A surprising result of Covid, and a vivid example of the impact of US stimulus measures on inflation, is how many American citizens found that their bank accounts were full of cash after being forced to stay at home, except for Amazon and eating and spending money.
Thanks to three rounds of stimulus, personal income reached a new high. According to the BEA (Bureau of Economic Analysis) report in March 2021, through MishTalk, disposable personal income increased by 23.6% to $4.18T; personal consumption expenditure increased by $616 billion, or 4.2%.
The latter is particularly important. This not only shows that Americans are saving money; they are also spending money. Considering that consumer spending usually accounts for about two-thirds of the economy (69.7% of GDP in the first quarter), even a small percentage increase can lead to billions of dollars worth of spending, which can affect total output/GDP make a large impact.
Wolf Richter of Wolf Street uses this data to become more refined. He observed that compared with March 2019, personal income from all sources, including government subsidies, increased by 31% in March, reaching US$24.2 trillion after seasonal adjustment. There are some good things below. Please keep in mind that all of these will affect the inflation rate. We believe that the inflation rate is much higher than 2.6% and will be reflected in official statistics in due course.
These are obviously large numbers. But unless we can prove that they actually cause inflation and higher prices are being passed down the supply chain, they are of little significance. Fortunately, we can.
After purchasing Wolf Street again, Richter worked harder to reprint an email from the president of a company that manufactures metal tiles for the American market.
"Our industry is dealing with supply chain shortages and rapid price increases. Although we have not reached this extreme in the types of professional products we produce, I have seen the price of "commercial" metal roofs in the past six. The month has increased by 30%, and it is expected to increase,” President Todd Miller wrote.
"As a metal roofing manufacturer, the following are some of the raw material growth we have experienced in the past six months":
"Then we have to deal with rising freight..."
"I suspect that some raw material prices are expected to weaken at the end of 2021 and early 2022. But the increase in labor and transportation costs will make it difficult for most manufacturers in our industry to cut prices-we will all work to restore profit margins from the increase in raw materials."
This last point is important because it shows that even if input costs fall, manufacturers are unlikely to lower their sales prices unless they can regain the profits they lost when input costs suddenly soared.
Richter cited the chief executives of Chipotle, Whirlpool and Kimberly-Clark as saying that they all plan to raise prices due to raw material inflation. In addition, according to BoA Global Research, the number of mentions of "inflation" on earnings conference calls so far has more than tripled year-on-year, reaching "the largest increase in our history since 2004."
An inflationary mentality has been formed. Rising input prices are squeezing profit margins, and large companies are raising prices and pointing to sharply higher inflation. The same is true for smaller companies, who have a down-to-earth view of rising costs...
Ultimately, all of this inflation is reflected in the US trade balance. In the first quarter, the balance of exports minus imports (trade deficit) increased by 4.1%, reaching the worst in history of US$1.18 trillion. (During the financial crisis, the deficit was only negative US$450 billion)
In simple terms, this means that imported goods and services far exceed exported goods and services (although there are still 25% tariffs on Chinese imports worth billions of dollars), resulting in "a huge drag on GDP." As Wolf Street reminds us, exports increase GDP, but imports decrease GDP.
Although there are more and more evidences of inflation throughout the economy, the dual mission is to keep inflation at about 2% in the Goldilocks zone and the Fed, which controls the unemployment rate, has been playing down inflation and telling the public that even if prices rise, it will only be Temporary or temporary inflation.
The Fed also stated that even if inflation exceeds 2%, it will not raise interest rates to cool the economy unless it is confident that doing so will not harm the recovery.
However, some believe that even before the official numbers became a problem, the Fed was misrepresenting it. Last week, the BEA reported that the core personal consumption index (the Fed’s preferred price index) for the 12-month period ending March 31, 2021 was 1.83%. This is less than a percentage point different from the inflation index data in 2020 and 2019. In his blog "Carson Report", Joe Carson questioned how last year's inflation rate was similar to previous years, because the economy has basically been closed for three months and GDP has plummeted by 31%.
"[Me] investors need to ignore the Fed's comments and treat the upcoming price increase as the'new' inflation," Carson wrote.
He also disputed the actions planned by the Fed, especially Jerome Powell's argument that once manufacturers increase production and eliminate supply bottlenecks, inflation will ease, and builders will build more houses. House price inflation will subside:
It is difficult to see how more supply (or growth) will slow inflation in the short term. The Federal Home Mortgage Corporation (Freddie Mac) estimates that the United States needs nearly 4 million new homes to meet demand. This may take two to three years. In addition, it is difficult to see how increasing product output will solve the inflation problem. Supply-side argumentation solutions; use more demand and more commodity inflation to fight inflation.
The mantra of the Fed has always been "inflation is everywhere, and it is always a monetary phenomenon." But in Mr. Powell's statement or comments, you did not find any monetary policy's role in or any responsibility for the containment of inflation. Investors are forewarned.
Still don't believe that inflation is becoming a problem? Just ask Warren Buffett. As reported by Zero Hedge, Omaha’s Oracle recently stated that the United States has set off a wave of inflation, and the situation will only get worse.
In a speech to Berkshire Hathaway's millions of shareholders on Saturday, Buffett said he was surprised by the "hot" rebound in the U.S. economy and warned that the company is being hit by inflationary pressures.
"We see that inflation is very serious," the 90-year-old billionaire who apparently does not have a Fed debit card said in a nearly 6-hour speech to investors. But it was what he said was particularly ominous: "It's interesting. We are raising prices. People are raising prices to us and it is accepted."
Why is this important? Because the ability to pass price increases and let them rise means that price increases will not be temporary, no matter how many times the Biden administration, the Federal Reserve, or the Treasury Department lied and vowed to the contrary.
The increase in commodity prices is not only a function of demand; the supply chain has been disrupted due to the pandemic and other factors, and the cost of raw materials has also risen sharply.
Take copper as an example. Last year, some temporary mine closures in major copper producing countries weakened supply and boosted prices. Chile’s copper production fell 4.8% to 430,100 tons, and Peru’s production fell 12.5% to 2.15 metric tons. S&P Global Market Intelligence said the impact of covid-19 may affect copper production until 2023.
Vanessa Davidson, head of copper research at CRU, pointed out at the World Copper Conference in San Diego that the government’s lockdown resulted in the cancellation of about 500,000 tons of copper production in 2020. Although copper production is expected to increase by 2.5% this year, many mining companies have decided to postpone the key Activities including divestitures and maintenance to protect workers may mean that the effects of the pandemic will continue to be felt in the coming years.
Recently, Chile, the world's largest copper producer, encountered another potential supply bottleneck, when port workers in the country went on strike.
It is not clear whether the two-day shutdown has affected copper shipments, but exporters estimate their losses to be US$1 billion.
Even if the manufacturing index goes up, supply chain problems have weakened industrial production. In the United States, the HIS Markit Manufacturing Purchasing Managers Index reached 60.5 in April, much higher than 59.1 in March (any number higher than 50 indicates expansion). The ISM manufacturing index reached its highest level since 1983 in March, but fell from 64.7 to 60.7 in April.
Zero Hedge stated that the supplier performance of commodity producers has been affected by the delays, and the delivery time has been extended to the largest extent on record. In addition to raw material shortages and supplier capacity pressures, the company has also linked delays to ongoing transportation disruptions, including port congestion.
In fact, the fiscal stimulus provided by the US government, including a direct aid check (helicopter money) of $1,400, means a one-way flow of goods, that is, imports from Asia (mainly China).
On April 14, S&P Global Platts reported that the Port of Los Angeles, one of the world’s most active container ports, was the busiest on record in the first quarter, handling more than 2.6 million TEUs. (20-foot equivalent unit). In March alone, the number of 957,599 TEUs passing through the terminal was twice the volume of goods transported in the same month last year.
Zero Hedge quoted HIS Markit chief economist Chris Williamson as saying, “U.S. manufacturers reported their biggest boom in at least 14 years in April. Due to the growing hopes for recovery and new stimulus measures, demand has soared at a rate not seen in 11 years. ."
However, Williamson pointed out that “the delay in the supply chain has deteriorated, reaching the highest level recorded in the survey, hindering the production of many companies. The most severely affected are consumer-oriented companies. The lack of input by these companies has caused production to be lower than order growth. As household spending has jumped, it has hit a record high in the past two months."
This pushes up the price...
"Due to strong demand for inputs, suppliers can demand higher prices, thereby pushing up material costs at a rate that has not been seen since 2008."
A different type of supply chain pressure is occurring in the Democratic Republic of the Congo, which is the source of most of the world’s cobalt, copper, diamonds and several key minerals essential to a new green economy.
This week, militants attacked the village and killed at least 19 people, including 10 soldiers, prompting the President of the Democratic Republic of Congo, Felix Tsiksekedi, to declare a state of siege.
In a well-known world’s richest country, violence has the potential to upend the mining industry; the value of its undeveloped mineral deposits is estimated at US$24 trillion. Militants often attack villages as a trick to steal metal and sell it on the black market:
The United Nations believes that more than 50% of the 200 mines in the region are controlled by the armed forces, which ensure the flow of mineral wealth through illegal taxation, extortion, forced labor and violence. According to a report by CNN, armed groups in eastern Congo have generated approximately US$180 million through illegal trade in tin, coltan, tungsten, and gold. These tin, coltan, tungsten and gold are easily accessible. Trade through the porous eastern border and flow into the international market...This unstable mixture of abnormal mineral wealth, ethnic tensions and proxy forces may drag the area into another brutal war... As tensions intensify and the 1994 genocide still casts a shadow in the region, another devastating war remains a clear possibility that is imminent. "Nathan William Meyer, "Deal of the Century: Will China Invest to Save Congo?"
Central banks are working hard to contain the impact of the pandemic on the economy. They realized that keeping interest rates low and maintaining monthly asset purchases (ie quantitative easing) did not bring the expected economic boost; now they are counting on fiscal policy, that is, government spending to solve the problem . However, the US government has no money and no way to raise that much money through taxes (Biden is a $16 trillion person), so they will borrow most of the money at the current lowest interest rate, or simply print more.
It is estimated that the US will have a deficit of US$2.3 trillion in 2021, which will not be as high as the US$3.1 trillion in 2020, but more than double the US$984 billion in 2019, and this is the result of the recent passage of Congress and its approval. Before the signing of the US$1.9 trillion US rescue plan.
More spending is on the way. A lot more.
Biden’s $2.3 trillion economic recovery plan announced in late March is its core content and is the largest infrastructure spending commitment since Roosevelt’s New Deal. It includes typical "tarmac road" improvement projects such as roads, bridges, ports, airports and public transportation, as well as billions of dollars in electric vehicle development funds. The third $1.8 trillion expenditure plan for education and healthcare was recently proposed by Biden.
The US government has spent US$4.5 trillion on pandemic-related relief and helped increase the national debt to US$28 trillion in less than a year.
In October 2020, the debt scale exceeded 100% of GDP. This was the first time since World War II, but this was just the beginning.
The Congressional Budget Office (CBO) predicts that with all this year's expenditures, the national debt in 2021 may surge to 35 trillion U.S. dollars! That was before adjusting the fiscal stimulus
Historically, there has been a close correlation between gold prices and debt and GDP. The higher the ratio, the better for gold.
An article on the Economic Education Foundation FEE pointed out that by the end of 2020, US debt will account for 129% of GDP. In terms of background, this is nearly one-third larger than the entire US economy, and much higher than the debt-to-GDP ratio of Greece when it received the International Monetary Fund's bailout in 2010.
FEE also believes that under such unsustainable debt levels, the demand for U.S. Treasury bonds will eventually dry up. This may be one of the reasons why cryptocurrencies are currently performing so well:
It seemed that in the blink of an eye, cryptocurrency went from being discussed in the corner of the Reddit room and university lounge to a market of more than 2 trillion dollars. It is no exaggeration to say that cryptocurrency is now the mainstream. They are being swallowed up by 10-figure contracts signed by hedge funds and star athletes.
It is not difficult to see why. The market is hedging. Like a rat on a sinking ship, many people are looking for an exit, feeling that the day of the dollar may eventually end because its value is eroded by large-scale pumping.
Another zero-hedging article entitled "Gold is mocking Powell" pointed out that as long as the Fed decides to print trillions of dollars and artificially limit yields and interest rates, the Fed can indeed "repay" nearly $30 trillion in public debt. The foreseeable future” because the cost of debt is forced to become the basis of history.
But what Powell cleverly forgot to say is that the "foreseeable future" he is telegraphing is nothing more than an equally foreseeable future, and it has expanded outrageously, so the depreciated U.S. dollar needs the U.S. dollar to monetize the truly unsustainable debt. .
Needless to say, this kind of money printing is good news for gold...
Gold is a tool to hedge against inflation, so it is usually bought when inflation is rising or appears to be rising to prevent currency depreciation.
We learned from a previous article that the purchasing power of most Americans to earn or receive wages has stagnated in the past four years. It all depends on inflation and legal currency cannot withstand inflation.
American wages have failed to keep up with the inflation rate. Wage earners are being screwed up every day because the value of the dollar depreciates very little. However, over time, the value of the reduction is huge.
Since 1950, the U.S. dollar has lost 90% of its purchasing power.
In contrast, since 1972, gold has risen from $35 per ounce to $1,750.
Inflation eroded the purchasing power of fiat currencies, and eventually they became worthless.
Most people make causal errors when talking about inflation and price increases. In an article criticizing Modern Monetary Theory (MMT), the Mises Institute stated that
Like most "mainstream" economists, Culbreath incorrectly defined inflation as "a rise in the price level." But rising prices are the result of inflation, not the cause. Inflation is exactly what the central bank does to create money.
Contrary to the supporters of MMT, the harmful effects of inflation are not limited to periods of "full employment". On the contrary, whenever central banks artificially lower interest rates, they will feel it.
All signs indicate that gold will rise again in a period of heightened geopolitical tensions, tighter supplies, central bank purchases of gold, low interest rates, negative real yields, and possibly the worst inflation in decades.
Although gold has not yet responded to rising inflation, we expect it to respond eventually.
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