Commodity prices have soared recently, thanks to strong demand and the interruption of supply caused by the Russia-Ukraine war. The S&P GSCI commodity price index has jumped 27% so far this year.
Jeremy Grantham, co-founder of money manager GMO, sees commodities continuing their ascent for the short and long term.
“Decarbonizing our economy will be spectacularly resource intensive, and all key commodities required are finite in supply,” he wrote in a commentary.
“Russia’s desperate attack on Ukraine makes everything more unpredictable but for one certainty — this war will increase the pressure on raw materials in the short term.”
One crucial commodity is oil, and prices have surged, with U.S. oil prices climbing 63% over the past year. That’s not good for the economy, Grantham said.
Oil Prices and Recession
“In the West, historically, major spikes in the price of oil like today’s have always preceded or triggered recession,” he wrote. “A recession would likely interrupt the rise in commodity prices temporarily, but in the longer term it seems nearly certain that the trend in resource prices will continue to rise.”
In January, Grantham said stocks, bonds, real estate and commodities are in “super bubbles” that are ready to pop.
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Like him, J.P. Morgan strategists see commodity prices rising, and they see them rising big-time.
“In the current juncture where the need for inflation hedges is more elevated, it is conceivable
to see longer-term commodity allocations eventually rising above 1% of total financial assets globally, surpassing the previous highs seen during 2008 or 2011,” the strategists wrote in a commentary.
Possible 40% Price Increase
And what does that mean for commodity prices?
“[That] would imply another 30% to 40% upside for commodities from here,” the strategists said.
Meanwhile, rising commodity prices figure into Deutsche Bank’s forecast for recession.
“Two shocks in recent months, the war in Ukraine and the build-up of momentum in elevated U.S. and European inflation, have caused us to revise down our forecast for global growth significantly,” Deutsche Bank economists wrote in a commentary.
“[The war has caused] upheavals in markets for energy, food grains, and key materials,” the economists noted. “We are now projecting a recession in the U.S. … within the next two years.”