Heavy speculation by futures traders has pushed prices for metals like copper and gold to historic highs as funds bet on coming supply shortages and try to hedge against inflation.
Copper has risen 30 percent since early March and this week broke through $11,000 a tonne, its highest level ever. This has helped lift prices of other industrial metals from aluminium to zinc.
The rush of investor buying also saw gold surpass previous records, reaching $2,450 an ounce, and silver subsequently rose above $30 an ounce for the first time in a decade.
There have been “strong investment inflows” into metals from algorithmic traders, specialist commodity investors and macro funds, said Greg Shearer, head of base and precious metals strategy at JPMorgan.
The development of metal prices often fell short of traders’ expectations. Strong demand last year helped drive inventories to historic lows, but prices still fell. This year prices have increased even as supply improves.
Commodities’ share of global markets has now shrunk, falling to two percent in the past 12 months from 8.8 percent in 2009, according to Bloomberg data, while stocks and bonds rose sharply.
“From a fundamental perspective, the market has ignored everything,” said Ricardo Leiman, chief investment officer at KLI Asset Management, a London-based commodities investment manager.
Analysts said the moves were driven by an increase in open interest – the number of open futures positions and market depth.
Open interest in the base metals and precious metals markets reached record highs of $227 billion and $215 billion, respectively, last week, according to a JPMorgan analysis.
Analysts say this largely consists of funds closing their bets on falling prices and taking long positions to profit from price movements, rather than producers or consumers hedging against the risk of price movements when buying or selling commodities.
Investors’ net long positions in base metals on the Comex and London Metal Exchange stood at 2.6 million tonnes in mid-May, compared with 556,000 tonnes in early March, surpassing the previous peak set at the end of 2020.
The wave of money hitting metals came not just from impulse-driven algorithmic traders, but also from macro hedge funds increasing their allocation to real assets and specialized commodity hedge funds, analysts said.
Copper, which is paramount to the decarbonization process, has led the price rise. Shearer said a “very difficult to resolve supply situation” was the reason for copper’s rise.
“For copper, the supply shortage exceeds what is possible [artificial intelligence] “The increase in demand and the greater certainty that we are at an inflection point in global demand, as well as the hedge against inflation, have been a powerful mix,” he said. “That has led to many funds saying, ‘Now is the time for copper.'”
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Other base metals such as zinc, aluminum and lead followed copper, rising between 15 and 28 percent in a strong collective uptrend since the beginning of April.
Aline Carnizelo, managing partner of Frontier Commodities, a newly formed commodity investment firm, said investors are looking to diversify their returns beyond big technology stocks by turning to metals.
Funds invest in commodities to “participate in decarbonization and deglobalization, hedge against inflation and geopolitical risks, and protect against underinvestment in new sources of supply, particularly in the energy sector,” she said.
Flows into broad commodities funds – including grains, minerals, metals, cotton and cocoa – have risen in recent months, more than doubling to 1.9 billion pounds in April, according to Morningstar data.
Despite weaker-than-expected demand in China and a rapid buildup of metal inventories, there are signs that global production is finally turning a corner, which has also helped fuel interest in silver given its extensive use in solar panels. China’s purchasing managers’ index rose for the second month in a row in April after contracting for half a year.
The move by Australian mining group BHP to buy rival Anglo American for £34 billion to secure its coveted copper mines in Latin America has also sent another signal to investors to snap up the red metal, according to investors.
“The BHP takeover made a lot of people realize that it was much cheaper to buy a company than to build a new mine,” Leiman said. “It caused a lot of people to leave their positions and for that [computer-driven trend-following hedge funds] and some of the macro investors are going long. There has been a massive restructuring of flows.”
On a net basis, 13 percent of global fund managers surveyed by Bank of America were overweight in commodities in May, the most since April last year. According to the survey, the last three months saw the biggest increase in their commodity allocation since August 2020.
Some top hedge funds have increased the size of their commodity trading teams to capitalize on the volatility of the asset class. Family office BlueCrest Capital plans to increase the size of its trading teams, including in commodities, by 10 percent by the end of the year.
Commodities have typically been traded based on their current supply and demand situation, but Carnizelo said the increasing role of speculative investors in the market means they are starting to trade based on what is likely to happen in the future.
“Commodities are starting to behave a little like stocks,” she said.