Inflation crisis in commodity market

The same question is often asked recently: why global stock markets are rising, gold is rising, oil is rising, real estate is rising, and even art is rising. Indeed, global asset prices appear to be hitting multi-year or all-time highs no matter what you look at. The Dow Jones Industrial Average is nearing a record, and the MSCI All-Country World Index hit a new session high last week. Copper, aluminum, zinc and nickel in the commodity sector all hit record levels last week, while gold hit 25-year highs, breaking the $700 an ounce mark.

Why is the international commodity market soaring

It seems that the global economy has not encountered such a grand event for a long time. While the stock market has risen sharply, the commodity market has overshadowed the limelight of the stock market with a higher rise. All kinds of metals, including gold, copper, aluminum, zinc and nickel, as well as oil have risen to surprising levels. Why exactly?

One of the reasons recognized in the international market is the rise of China and India. The demand for raw materials generated by the economic growth of China and India has had a demand impact on the original pattern of the international commodity market. The international market believes that China's investment still shows no signs of slowing down. Last year, the proportion of investment in GDP was still as high as 49%. The strong demand for raw materials brought about by this should not be underestimated. Under this expectation, the commodity market continued to rise.

Of course we can't deny that the rise of China and India is indeed a very important reason, but compared with it, the global currency surplus problem may be more worthy of attention. Schroders Group, a foreign shareholder of Bank of Communications Schroders Fund, recently released a report that the currency issue behind the rise in the global commodity market is a very important reason.

During May Day, the international gold price went straight to $700 after crossing the $600 mark. Prices of related metal commodities also continued to rise, little affected by the rate hike by China's central bank. When the public's attention is focused on whether the RMB appreciates against the US dollar, the rise in the price of gold reminds investors that almost all currencies denominated in gold, the most important hard currency in history, are obviously "depreciating", including not only the US dollar, but also the The appreciation of the Chinese yuan and the euro.

The depreciation of the real value of this currency is actually a "sequel" of the central banks' loose monetary policies and a large number of currency issuances. Since 2001, in order to hedge against the high-tech bubble in the United States, the Federal Reserve continued to implement a loose monetary policy. Greenspan lowered the benchmark interest rate from 4-8% to about 1%, and maintained it for three years. Japan also implemented an ultra-loose monetary policy, cutting interest rates to zero. China and many European countries also passively implemented loose monetary policies.

In fact, the increase in currency issuance is equivalent to injecting water into the asset pool, so the price of commodity assets priced in currency prices will rise. Since the United States implemented loose monetary policy in 2001, the global crude oil price has continued to rise, from less than $20 to the current high of more than $70. Subsequently, the prices of various metals have also risen all the way, and some have even doubled by nearly 10 times.

In addition to raw materials, other major asset markets have emerged from the bull market. The international bond market has been in a bull market for many consecutive years. The rise in real estate is obvious to all. prices are also continuing to rise. The depreciation of the real value of the currency means that your bank deposits are shrinking. It is impossible for the rich to remain indifferent. Everyone must take measures to preserve their wealth. The most common way is to buy houses and stocks. Some people collect treasures, and some people simply hold gold .

Inflation worries appear

From the past historical point of view, usually rising raw material prices are the prelude to inflation. Strangely, however, five years have passed since 2001, and while asset prices have risen, inflation has not officially arrived. Both in the US and China, the CPI (Core Inflation Index) has remained low.

Some studies believe that in the context of economic globalization, due to the participation of a large number of cheap labor in China and India in the international division of labor, labor costs and service prices have been lowered, coupled with unprecedented technological advancements such as the Internet, These changes brought about an increase in productivity and a gradual decline in the prices of manufactured goods. Therefore, inflation is not reflected in general commodities.

Nevertheless, this situation should be said to be unsustainable. If other conditions remain unchanged, the rise in raw material prices will eventually be reflected in consumer goods, and the CPI will eventually be "contagious". In the 1970s, global inflation driven by oil prices was transmitted from oil prices to rising metal prices, followed by changes in agricultural prices, and finally global inflation was issued. Although some people believe that China is currently in deflation, what we must see is that even in the 1970s when the economy was not very open, we inevitably infected inflation. With such a high degree of economic openness, China is very Difficult to isolate from the overall economic tide.

Fortunately, all countries have actively adopted austerity measures such as raising interest rates to control the economy, try to keep inflation at a minimum level, and smooth the negative impact of economic fluctuations. As for whether inflation can be curbed in the end, it depends on future economic data.

Increasing risk and preserving value

As the world's eyes turn to commodity markets, investment guru Warren Buffett recently declared in a high-profile manner that he believes that a "bubble" has emerged in commodity markets. In fact, there is no clear definition in economics for "bubble", but even ordinary people understand a truth that there is no reason for any market to keep rising. Brilliant flames always have a dark day. In particular, many market participants believe that there is a strong "hype" atmosphere for some trading products in the international commodity market, and the price trend seems to have deviated from the fundamentals. Investors should pay special attention to this.

Usually when the macroeconomic atmosphere is uncertain, international safe-haven funds tend to prefer assets such as gold and real estate. Recently, some foreign scholars believe that, in general, asset prices depend on the expected return of assets, but in the case of depreciation of the actual value of the currency, the asset value cannot be fully measured by the return on assets.

Take real estate as an example. In the past, it was generally believed that house prices mainly depended on rental income and resident income. The comparable indicators were rental yield and house price-to-income ratio. But these are all metrics when pricing property as a consumer product. If people buy property as a store of value, these metrics become meaningless, as buyers sometimes refuse to even rent it out as a hedge against inflation. effect.

Another phenomenon is gold, which never yields gains, but is still popular when paper money is devalued. Gold is generally considered to be the best safe-haven tool, but if indicators such as yields are to be applied, gold is often difficult to price.

From this point of view, the prosperity of various markets around the world still has high irrational factors. Its prices have been greatly deviated from the fundamentals, and the risks involved are already very high.