Last few months have been a great time for commodities market. There are various reasons attributing for this bull run. One of the attributes is the extra ordinary money supply from various governments to their citizens to survive the pandemic. This supply or stimulus has created excess of capital with many citizens in countries like the USA and the European Nations. In fact, the USA has given almost $60000 per family as part of the $5 trillion stimulus package. This excess capital resulted in additional liquidity in the respective economies which has resulted in inflation in the metals/ commodities related investment in the housing industry. The result of this inflation is evident in the rising trend of prices in housing and real estate businesses in the United States. Crypto currency gained momentum too during the pandemic until the recent crash in the crypto market which increased the uncertainty resulting in tremendous rundown in bitcoin prices and other cryptocurrencies too. This indicates that there exists a strong relationship between supply of money and devaluation in money which results in high commodity prices which eventually disrupts the value of the underlying asset.
Does this mean that the commodity market is going through a super cycle? To understand this, we must understand the various initiatives taken up by various governments to overcome unemployment and uplifting their economies. Many governments have given a push to their projects which has increased the requirement of commodities and was well supported by private consumption due to lower pricing. In short, the prices of commodities will rise further to meet the demand and supply equilibrium, but this is due to the artificially inflated demand and the prices will stabilize over the period. Hence, in the long-term commodity, super cycle cannot be justified. We have noticed that in the past few days, price of gold was falling but cryptocurrency prices were increasing and shooting to reach the “moon” (Doge Coin reference) until the recent crash which was a result of tweets from the trend setter Elon Musk. The regulations set by the Chinese Government also contributed to the bitcoin market crash. These eventually led to the exhaustion of the speculative money and shifting investment to the precious metal market which will increase the prices of gold and silver in the coming days.
It is always wise to balance your portfolio to mitigate risks caused by a highly volatile market like the Cryptocurrency market. Long term investment in gold can be the best tool to hedge against volatility and uncertainty. Be careful and consider market risks and your risk appetite before making any investments.
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Dr. Laxmi Goritiyal