Inflation And The Next Commodity Supercycle?

Recently, there was quite a bit of media attention on the rise in silver prices.

It had more to do with speculation of another attempt to corner the market similar to the GameStop move earlier in the month. But, that turned out to be just mainly rumors.

Despite the loss of interest in coverage, silver had been appreciating for other reasons worth looking into.

In fact, most commodities have been on the rise, from copper to nickel, to crude. A relatively simple and somewhat obvious explanation is the expectation for inflation.

Commodities, particularly the more liquid ones like gold and silver, have the advantage of intrinsic value. This makes them a lot more attractive over fiat currencies in periods of economic instability.

There is more to it than meets the eye

A rush to invest in hard assets to offset particular concerns about inflation would raise the price of those commodities. Those commodities, in turn, are used to produce goods and services.

So, higher prices in raw materials would likely translate into higher prices in finished products. Something of a self-fulfilling prophecy.

Therefore, it’s important to not just analyze whether commodity prices are increasing, but at what rate. Most commodities are priced in dollars.

This means that if the dollar is worth less, it means it buys less of a given commodity. So, the value of that commodity goes up. This is a post-facto reaction; a response to inflation.

If the prices of commodities are rising faster than inflation (ante-facto), then it can be seen as a driver of inflation.

So, another supercycle?

In the first decade of the millennium, prices of commodities moved progressively higher after China joined the WTO and their exports massively increased.

To meet the demand for raw materials, the Asian giant massively increased its commodity acquisitions. On top of that, Chinese citizens and businesses, wary of the stability of their own currency, bought commodities. In particular, they bought copper to offset potential fluctuations in the yuan.

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