A surge in speculation by futures market traders has propelled the prices of metals like copper and gold to record highs, driven by funds betting on supply shortages and seeking to hedge against inflation.
Copper has surged 30 percent since early March, breaking through $11,000 per tonne this week, reaching an all-time high. This rally has also boosted the prices of other industrial metals such as aluminum and zinc.
Investor buying has pushed gold to new heights, hitting $2,450 per troy ounce, while silver has exceeded $30 per ounce for the first time in a decade.
Greg Shearer, head of base and precious metals strategy at JPMorgan, noted significant investment inflows into metals from algorithmic traders, specialist commodities investors, and macro funds.
Metal prices have frequently defied traders' expectations. Last year, strong demand depleted inventories to historic lows, yet prices fell. This year, prices have surged even as supplies improve.
Meanwhile, commodities' share of global markets has shrunk, dropping to 2 percent over the past 12 months from 8.8 percent in 2009, according to Bloomberg data, as equities and bonds have outpaced them.
“The market was kind of ignoring everything from a fundamental perspective,” said Ricardo Leiman, chief investment officer at KLI Asset Management, a London-based commodities investment manager.
Analysts attribute the price moves to a surge in open interest, which is the number of open futures positions and the market's depth.
Open interest across base and precious metals markets reached record highs of $227 billion and $215 billion, respectively, last week, according to a JPMorgan analysis.
This increase mainly involves funds closing bets on falling prices and taking long positions to profit from price moves, rather than producers or consumers hedging against price risks when buying or selling commodities.
Net investor long positions on Comex and the London Metal Exchange for base metals reached 2.6 million tonnes in mid-May, up from 556,000 tonnes at the beginning of March, surpassing the previous high in late 2020.
The influx of money into metals has come from momentum-driven algorithmic traders, macro hedge funds increasing their allocation to real assets, and specialized commodities hedge funds, analysts said.
Copper, crucial for the decarbonization process, has led the price surge. Shearer noted that a "very hard to fix supply picture" underpinned copper’s rally.
“For copper, the tightening supply picture, combined with potential artificial intelligence-driven demand, confidence that we're at an inflection point for global demand, and inflation hedging, has created a potent mix,” he said. “That has prompted many funds to see this as the opportune moment for copper.”
Other base metals such as zinc, aluminum, and lead have followed copper’s lead, increasing between 15 percent and 28 percent since early April in a sharp collective upswing.
Aline Carnizelo, managing partner of Frontier Commodities, a newly established commodities investment vehicle, noted that investors are seeking to diversify their returns beyond major technology stocks by turning to metals.
"Funds are investing in commodities to gain exposure to decarbonization, deglobalization, inflation hedging, geopolitical risks, and the under-investment in new supplies, particularly in energy," she said.
Inflows into broad-basket commodities funds—including grains, minerals, metals, cotton, and cocoa—have surged in recent months, more than doubling in April to £1.9 billion, according to Morningstar data.
Despite weaker-than-expected demand in China and a rapid build-up of metal stocks, there are signs that global manufacturing is finally rebounding, sparking interest in silver due to its extensive use in solar panels. China's purchasing managers' index expanded for the second consecutive month in April after six months of contraction.
Australian mining group BHP's £34 billion bid to acquire rival Anglo American to secure its coveted copper mines in Latin America has further signaled to investors to invest in the red metal.
“The BHP takeover alerted many that it's much cheaper to buy a company than build a new mine,” said Ricardo Leiman, chief investment officer at KLI Asset Management. “It prompted many to unwind positions and for computer-driven trend-following hedge funds and some of the macro crowd to go long. There has been a massive reorganization of flows.”
A net 13 percent of global fund managers surveyed by Bank of America were overweight on commodities in May, the most since April of the previous year. The past three months saw the largest increase in their allocation to commodities since August 2020, according to the survey.
Some top hedge funds are expanding their commodities trading teams to capitalize on the asset class's volatility. Family office BlueCrest Capital plans to increase its number of trading teams, including those in commodities, by 10 percent by the end of the year.
Commodities have typically traded based on their current supply and demand situation, but Carnizelo pointed out that the growing role of speculative investors means they are starting to trade based on anticipated future conditions.
“It’s starting to make commodities behave a bit like equities,” she said.
