In early 2022, co-CEO Barry Goodman discussed the possibility of a broad, structural upheaval in global commodities, resulting in a regime characterized by heightened volatility and upward price pressure. Here, he revisits those ideas, seeks to calibrate where we are in the cycle, and reassesses what’s next for investors.

Another key topic reexamined here is Mr. Goodman’s belief that a disruption in commodity markets is likely to spill over into other asset classes. These “ripples,” according to Mr. Goodman, are likely to cascade outwards to obvious places like stocks, currencies, and bonds but also non-traditional markets and themes, including carbon mitigation and the blockchain.

Please see important disclosures appearing here.

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Barry, two years ago, you identified some of the main drivers for the start of a potentially dramatic era for commodities driven, in part, by increasing supply/demand imbalances. How do you read this today?

BG: A lot has changed over the last two years, but much has stayed the same. Many of the drivers that I was looking at back then reflected longer-term structural shifts, especially around themes of carbon neutrality, energy transition and ESG. These longer-term structural imperatives are still very much in place. But the realities of near-term implementation around some of those policies (including pressures with respect to the “greenwashing” backlash and the cost of the transition in the era of higher interest rates, as two examples) have slowed developments a bit. And these delays have meant that in some of these energy transition markets, mismatches between government policies, capital expenditure choices and still high levels of demand have likely exacerbated volatility, potentially creating shortfalls in the supply of certain commodities required to meet net-zero goals.

Beyond this, stressed international relations and outright conflicts have created additional distortions in supply-and-demand dynamics for commodities. I had previously written about the impact of the war in Ukraine. Two years later, that struggle sadly continues. Supply chains remain fragile, conflict in the Middle East has intensified, and relations between Russia, China, and the U.S. have arguably worsened. Add in this year’s Presidential election in the U.S., and it would be reasonable to assume that distortions in commodity markets will remain or grow.

So, we have today, in my view, a scenario where long-term disruption to the status quo in commodities is combined with short-term stresses brought on by major geopolitical issues. This mix can create an environment that is less resilient to shocks.

Have we already seen specific examples of price imbalances in commodity markets?

BG: Yes, and this is really a lesson from your economics courses as an undergrad. The factors determining the prices of commodities are by no means constant. So, instead of movements along the supply and demand curves, we are in some cases, seeing meaningful shifts in the respective curves themselves. The market equilibriums—the prices—are growing increasingly volatile. For example, on the demand side, China has recently increased incentives on EVs and other areas of manufacturing, which has intensified demand for certain commodities. On the supply side, you have seen cuts from refineries in China, mine closures, and protests in Peru and Panama. As a result, copper, for example, has hit levels unseen in decades. Lithium and other key green transition metals have also risen sharply. Gold has hit all-time highs, with some seeing it as a flight to safety in an era of higher inflation.

Elsewhere, volatile weather patterns and other natural events can create volatility in commodity pricing. Cocoa prices, for example, nearly quadrupled over a 12-month period in the face of a substantial supply deficit due to crop disease and severe weather in the Ivory Coast and Ghana, two key producing countries, combined with a lack of planting. While prices have come down from stratospheric heights, they remain at eye-popping levels.

"The rise in artificial intelligence, specifically the rush to create sophisticated chips that run large language models for things like ChatGPT, has opened an entirely new vector of demand for commodities like copper. In many respects, this has added to some of the price pressures we have seen in commodities. Power consumption, including natural resource use required to create the electricity needed to run these models, is also likely to be one of the knock-on effects of the popularity of this technology. And I believe we can expect this will ripple to other asset classes."

Barry Goodman

co-CEO & Executive Director of Trading

Are there any new forces that have emerged?

BG: The rise in artificial intelligence, specifically the rush to create sophisticated chips that run large language models for things like ChatGPT, has opened an entirely new vector of demand for commodities like copper.  In many respects, this has added to some of the price pressures we have seen in commodities. Power consumption, including natural resource use required to create the electricity needed to run these models, is also likely to be one of the knock-on effects of the popularity of this technology. And I believe we can expect this will ripple to other asset classes.

Since you referenced the ripple effects commodities have had on other asset classes, give us an example of how that has unfolded.

BG: I believe commodity market upheaval is contributing to inflationary pressures, which, of course, impacts asset prices across various sectors. Here in the U.S., for example, sticky levels of inflation that remain above the Fed’s target rate has impacted interest rates, affecting the real economy, including real wages, the real estate sector, consumer spending choices, and even the stability of the regional banking system.

Separately, the disruption in commodities has led many nations to reconsider trading blocs, which in some cases carries with it the potential for accelerated erosion of the U.S. dollar as a reserve currency. With increasing sanctions on Russia, China’s yuan recently supplanted the U.S. dollar and the Euro as Russia’s primary foreign currency for overseas economic activity. For China, the share of its own trade transacted in yuan as opposed to USD has moved from practically zero in 2010 to more than 53% today. Countries like Brazil and some Southeast Asian nations have also called for trade to be carried out in other currencies besides the U.S. dollar. This de-dollarization isn’t just an economic consideration. It also potentially decreases the effectiveness of Western sanctions, for example, which, depending on how one looks at it, could be destabilizing from a geopolitical point of view.

How are commodities connected to the blockchain and cryptocurrencies?  How does this connection become more meaningful?

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BG: The case for digital assets has grown over the last two years. Going forward, I believe the focus will be on cementing protocols and regulations to promote innovation, creating a convergence with traditional finance. Cryptocurrencies, in particular, play into the narrative of disruption and some of the themes around supply chains and geopolitical alignments, and also with respect to themes around alternatives to the U.S. dollar, as I just mentioned.

While crypto had been less interesting to many investors since the FTX collapse, the case for digital trading of futures on regulated exchanges has helped remove some of the perceived counterparty risks, and recent approvals and launches of certain bitcoin and other ETFs have provided more reasons for mainstream adoption. Volumes are trending up. Central banks worldwide are looking to develop their own digital currencies to promote the democratization of various asset classes in a secure and accountable fashion. And institutions are starting to invest. So, while the use-case jury remains out, crypto looks more like a potential facilitator of disruption every day.

What comes next?

BG. Some people have been using the phrase “higher for longer” to describe how to look at interest rates or inflation, but I tend to think of that phrase in terms of volatility. That’s a trading opportunity, but you need strategies that can adapt to these new regimes and are nimble enough to respond quickly to shocks. It starts with commodity disruption but doesn’t end there.

To revisit Mr. Goodman’s original thoughts on this topic from May 2022, please click here.