Why it’s a ‘perfect storm’ for commodities right now

Gold prices (GC=F) hit a record high today, boosted by increasing geopolitical uncertainty following the death of Iran’s president. Blue Line Futures Chief Market Strategist Phil Streible and Wolfe Research Managing Director Timna Tanners join Market Domination to discuss why commodities — including other precious metals silver (SI=F) and copper (HG=F) — have seen such a boost.

Streible explains that when trading commodities, investors need to identify two things: A supply-demand imbalance and market momentum. He says that in the instance of copper, demand is soaring amid a green energy revolution and an artificial intelligence push:

“The combination pushes demand for copper, silver, and other metallic metals higher for the first time in over a decade, and this comes at a time when increased regulation makes it harder for additional supplies of these metals to come into light and end up in the end user’s hands. So, it’s just creating this global deficit right now. It’s a perfect storm for commodities.”

“Don’t let the facts get in the way of a good narrative here,” Tanners warns. “The reality is, this is really a squeeze that’s happening in the financial community more than in the physical market,” she explains, saying that copper saw a lot of short squeezes.

“When it comes to investing of any type, you always want to manage position sizing, making sure that it’s risk capital that’s involved,” Streible adds. Tanners also notes that investors should be watching China in the commodities market, as its electric vehicle sector skyrockets and new measures to revitalize its property sector have been introduced.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Melanie Riehl

Video Transcript

Commodities have been on a tear, specifically metals, gold prices hitting a record high today.

Boosted by mounting geopolitical uncertainty fueled by the death of Iran’s president over the weekend, we’re looking at how to navigate the big picture with the Yahoo finance playbook.

And we’re joined by Phil Stri Blue line futures, chief Market strategist and Tim Natan, managing director at Wolf Research.

Thank you both for being here.

Phil.

I’m gonna start with you.

Um It’s not just gold, silver, copper.

We are really seeing some pretty amazing um increases in many of these medals.

Does a lot of it have to, I mean, is it sort of the dual thing here of geopolitics and then A I that’s helping fuel this?

Yeah, if you break it down into copper, I mean, you know, when you trade commodities, it doesn’t matter what it is, you really got to identify two characteristics when investing it’s a supply demand, imbalance and its market momentum.

You look at copper, for instance, you’ve got increased electrical power use because of the green energy revolution.

You’ve also got rising demand from electric vehicles and advancement of A I have also strained the outdated electrical grid.

So the combination pushes demand for copper, silver and other metallic metals higher for the first time in over a decade.

And this comes at a time when increased regulation makes it harder for additional supplies of these metals to come into a light and end up in the end user’s hands.

So it’s just creating this global deficit right now.

It’s a perfect storm for commodities and Tim now you cover the miners.

Can you give us an overview and these are very different companies uh depending on what’s mined and scattered throughout the world, different geopolitical structures and, and things at play.

What are factors that the miners are being, are concerned with right now and some of those that are translated into higher prices down the stream amount of new copper mines starting up this year.

There’s um we can rattle off a couple off the top of our heads, the K of Eco QB two, there’s Oy Togo and uh Koa Kula.

So there’s quite a bit of copper coming on and a lot of the new copper demand isn’t gonna hit the market till 2030 especially data centers may be a 1 to 3% global phenomenon over from 2020 to 2030.

So there’s nothing really very incrementally supporting this um massive rally aside from a small deficit in copper if you look at the data.

However, you know, there’s nothing to get in the way of a good um the facts don’t want the facts to get in the way of a good narrative here.

Um The reality is this is really a squeeze that’s happening in the financial community more than in the physical market.

Uh There’s a lot of shorts that were squeezed in copper.

It’s quite a bit of analysis on that.

Um And definitely, um you know, the phenomenon of Russian material not being able to delivered to the US is causing a physical squeeze in terms of the miners.

Um Certainly they are enjoying these higher prices.

Uh It’s hard to explain if how sticky they’ll really be from what we just described.

Um There is the high profile potential uh acquisition of Anglo by BHP that looks like it’s hitting a wall here, but we aren’t hearing a mass amount of M and A. Um even though it is hard to build, it’s also getting expensive to buy.

Well, and Phil to circle it back to you, if indeed at least a substantial portion of the copper rally is a short squeeze.

Like if you’re not an experienced trader, do you wanna try and chase that?

I mean, how much sustainability does that have?

Well, this is where you gotta really put your thinking cap on.

You’ve got to manage your risk, you’ve gotta manage your position.

Sizing of the uh more recent plays that we had recommended to our clients was a particular call spread where it’s a calculated risk trade, which has a favorable risk to reward ratio, but it also defined the risks involved.

So when it comes to investing of any type, you know, you always want to manage position sizing, making sure that it’s risk capital that’s involved.

So if you were step into the market right now, you know, on the copper market, you could take some of these calculator risk option play or you could look at the micro copper contract which is only 2500.

So every penny move, say from something like $5 to 501 would be a $25 positive impact in your account or a dip down to 499 a $25 negative impact Tim.

Now let’s stick with risk risk management here.

Uh So the approach that we would have with the futures market and whether you’re investing directly in the futures or an ETF that’s a little bit different than a stock play where you’re investing in with miners.

How do you go about that?

How do you advise clients?

Uh the best way to approach?

We have coverage names that are a little more liquid like Freeport.

We have names with a nice dividend like Southern Copper and then we cover tech resources which we think has the most interesting combination of a little discounted valuation because it’s a show me story and execution of their operational ramp up at QB two and some more interesting growth.

So in our view if you can have copper exposure with copper growth, that’s the way to go.

Um Tim, I wanna turn to gold and silver a little bit more now too because as you look at the miners, I mean, many of them do multiple different metals that they are mining.

But I’m curious what you think about the trajectory for those medals and which miners might be best poised to take advantage?

Sure.

We don’t unfortunately cover precious.

We do have a exposure through Freeport where they do mine gold or um their grass mine is the largest gold producer in the world and it’s a great by-product credit benefit to them.

It’s an interesting market when you see geopolitical risk helping gold but also copper at all time highs.

It’s not usually um you know, they usually uh go in different directions.

So it’s a, it’s an incremental positive for sure, for Freeport.

And uh Phil talk to me please about some of the volatility that we’ve seen in the futures market this year.

I was just looking at uh a heat map we have on the Wi Fi Interactive and Cocoa is actually up the most this year.

It’s up 68% although it’s still down 30% from its highs.

Just wondering uh how investors should consider some of the volatility embedded in these markets before rushing out and, and investing in a, in a metal.

Yeah, this is where you got to weigh in as far as those many and micro contracts account size and everything else.

A lot of the volatility we’ve seen, you know, is because of the rising geopolitical tensions.

You’ve also seen increased consumer investments and one of the largest speculative long positions that we’ve seen in the last two years in the gold market.

So you get geopolitical events, things that happen over the weekend and things like that, you’re gonna see a lot of that volatility here because of the fact that people are so embedded in the market.

They’ve got so much exposure there and the more participants you have coming in there, it’s like a river and they all rushes in one direction here at the moment.

So you always got to keep your 1 ft out of the door here and be ready to, you know, be the first person to leave.

They always have an old saying in commodities, you want to arrive to the party late but be the first person to leave.

I like that, Tim uh I’m gonna give you the last word here.

Anything we didn’t touch on.

Uh in this uh in this discussion that you want to leave with viewers, I think you can ignore the 800 gorilla in the room which is China.

China accounts for 50% of all demand for commodities that we follow on the middle side.

Um And I think that China is a big question mark so clearly, they’re farther along in terms of eb adoption than we are here in the North American market.

But um you know, and so that’s positive for transmission lines for copper demand.

But on the flip side, their property sector is I’d say in very late innings of development, you’ve seen, you know, months now of the completion side reversing which is usually negative for copper.

So are we seeing net copper demand in China or not?

I think a lot of that will depend on how the stimulus measures play out.

And so far they’ve not been that impressive.

So I think we have to include China in any of these discussions.

All right, never forget the 800 gorilla.

Thank you, Timna and Phil.

Matt Earle

Matthew Earle is the Founder of MiningFeeds. In 2005, Matt founded MiningNerds.com to provide data and information to the mining investment community. This site was merged with Highgrade Review to form MiningFeeds. Matt has a B.Sc. degree with a minor in geology from the University of Toronto.

By Matt Earle

Matthew Earle is the Founder of MiningFeeds. In 2005, Matt founded MiningNerds.com to provide data and information to the mining investment community. This site was merged with Highgrade Review to form MiningFeeds. Matt has a B.Sc. degree with a minor in geology from the University of Toronto.

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