Record high prices, combined with a strong bullish consensus, are the hallmarks of a speculative bubble. Copper has traded above $6000 per tonne, gold has breached $600 an ounce and Brent crude is at a record high, close to $70 a barrel. Speculative positions in oil and gold futures are high and building. Meanwhile, the mood at last week’s world copper conference in Chile shifted from residual disbelief to widespread acceptance of the bull case.
It may, however, be too early to place bearish bets. Following reports that the US is considering military strikes against Iranian nuclear installations, Iran has announced that it has enriched uranium. Rising geopolitical tension will continue to support both oil and gold prices.
Fund interest in the relatively small commodities markets also continues to grow. First-quarter inflows into 200 commodity retail funds tracked by JPMorgan were $7bn, twice the level of 2004 and 2005. Calling the end of a bull market too early can be painful.
If caution is warranted from potential sellers, the bulls too should consider the risks. Cheap money has fuelled the boom and tightening global monetary policy is a threat. Part of commodities’ appeal in recent years has stemmed from positive roll yields: when near-term prices are higher than longer-dated prices, investors earn positive returns by rolling their futures positions forward. Roll yields are now generally negative and aggregate commodity index investments have produced losses for the past two quarters.
The exception is in base metals, where very tight stock levels have maintained positive roll yields, albeit at recently reduced levels. But with copper prices, for example, trading at more than twice the costs of production, there is still a large speculative premium built in. Fund demand and political turmoil cannot indefinitely obscure the cyclical nature of commodities.