A flurry of speculation by traders in the futures market has pushed the prices of metals such as copper and gold to all-time highs, as funds bet on looming inventory shortages and try to hedge against inflation.
Copper has rallied 30 percent since early March to break through $11,000 a tonne this week, an all-time high. This helped lift the prices of other industrial metals from aluminum to zinc.
A flurry of investor buying also pushed gold past its previous highs to $2,450 a troy ounce, and silver subsequently topped $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.
Metal price movements have often defied traders’ expectations. Last year, strong demand helped deplete inventories to historically low levels, but prices still fell. Prices have risen this year, even as supplies are improving.
Commodities’ share of global markets, meanwhile, has shrunk, falling to 2 percent in the past 12 months from 8.8 percent in 2009, according to Bloomberg data, as stocks and bonds raced ahead.
“The market kind of ignored everything from a fundamental perspective,” said Ricardo Leiman, chief investment officer at KLI Asset Management, a London-based commodity investment manager.
Analysts say the moves were driven by an increase in open interest — the number of open futures positions and the depth of the market.
Open interest in the base metals and precious metals markets hit record highs of $227 billion and $215 billion, respectively, last week, according to analysis by JPMorgan.
This mainly consists of funds hedging their bets on falling prices and those 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, analysts said.
Investors’ net long positions on the Comex and London Base Metal Exchange were 2.6 million tonnes in mid-May, up from 556,000 tonnes in early March, surpassing the previous high in late 2020.
The wave of money hitting the metals came not only from momentum-driven algorithmic traders, but also from macro hedge funds that increased their allocation to real assets and specialty commodity hedge funds, analysts said.
Copper, which is the most important for the decarbonization process, led to a jump in prices. Shearer said a “supply picture that is very difficult to fix” is underpinning copper’s rise.
“For copper, the picture of a reduced road supply is possible [artificial intelligence] The increase in demand and the greater comfort that we are at an inflection point for global demand, plus the hedge against inflation, was a potent potion,” he said. “That’s why a lot of funds have said ‘now is the time for copper’.”
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Other base metals such as zinc, aluminum and lead followed copper, jumping between 15 percent and 28 percent since early April in a sharp collective upward swing.
Aline Carnizelo, managing partner of Frontier Commodities, a start-up commodity investment vehicle, said investors are looking to diversify their returns away from big tech stocks by turning to metals.
Funds put money behind commodities to gain exposure to “decarbonisation, deglobalisation, inflation and geopolitical risks, as well as underinvestment in new stocks, particularly energy”, she said.
Inflows into broad-basket commodity funds — including grains, minerals, metals, cotton and cocoa — have risen in recent months, more than doubling in April to 1.9 billion pounds, according to Morningstar data.
Despite weaker-than-expected demand in China and a rapid build-up of the metal’s stockpiles, there are signs that global production is finally turning around, which has also helped boost interest in silver, given its widespread use in solar panels. China’s PMI rose for the second month in a row in April after half a year of decline.
Australian mining group BHP’s £34 billion approach to buy rival Anglo American to secure its coveted copper mines in Latin America also sent a further signal to investors to snap up the red metal, investors said.
“The takeover of BHP woke up a lot of people to the fact that it’s much cheaper to buy a company than to build a new mine,” Leiman said. “This prompted many people to relax positions and for [computer-driven trend-following hedge funds] and some of the macro crowd go long. There has been a huge reorganization of flows.”
A net 13 percent of global fund managers surveyed by Bank of America were overweight commodities in May, the most since April last year. The last three months saw the biggest increase in their commodity allocation since August 2020, according to the survey.
Some top hedge funds are beefing up their commodity trading teams to take advantage of volatility in the asset class. Family office BlueCrest Capital plans to expand the number of its trading teams, including commodities, by 10 percent by the end of the year.
Commodities are usually traded based on current supply and demand, but Carnizelo said the increasing role of speculative investors in the market means they are starting to trade based on the likely future picture.
“Commodities are starting to behave a bit like stocks,” she said.