Commodity Prices On An Unstoppable Rally: ETFs To Benefit

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After 10 years of underperformance, commodities are on an unstoppable rally this year thanks to recovering global economic growth from the pandemic lows, reopening economies, reflation trade and massive stimulus flows. The central banks across the globe have injected trillions of dollars to stave off the pandemic-ravaged economy.

A weaker greenback added to the strength as it makes dollar-denominated assets attractive for foreign investors, raising the appeal for commodities. This is because commodities are often viewed as a hedge against inflation and a weaker dollar.

China, the world’s largest consumer of raw materials, has been driving commodity prices higher on improving conditions. The world’s second-biggest economy saw a record 18.3% growth in the first quarter of 2021. This represents the biggest jump in GDP since China started keeping quarterly records in 1992. China is buying a record quantity of soybeans, as well as grains like corn and wheat, and is trying to reduce the production of the key metals like steel and aluminum. Food prices are seeing a spike due to poor weather in the key growing nations like Brazil.

Lumber is also not behind as surging demand for suburban housing on record low mortgage rates and migration from cities continue to push its prices higher. The demand for air travel and cars has seen a surge, driving jet fuel prices higher, as restrictions have been eased and the economy has reopened. Manufacturing and industrial activities are also picking up with a spike in metal prices. Additionally, crude oil prices rebounded from record lows reached during the pandemic on accelerating demand and tight supply.

JPMorgan expects a continued rally in commodities as reflation and reopening trade will continue given that the Fed views inflation as temporary, which means that the economies will get overheated, resulting in more demand. Meanwhile, Goldman projects commodities to rally another 13.5% over the next six months on a worldwide reversal of coronavirus curbs, lower interest rates and a weaker dollar.

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