Some activity in the red metal and commodities

Commodities, particularly base metals are up quite sharply so far this year and seem to have a firmer tone looking into 2017/18. The principal reasons for the recent rises include faster than expected world economic growth forecasts, a lower US Dollar and shrinking supplies. In the case of the latter, there are also signs of stabilisation in demand from China as it seeks to maintain its course of steady growth at or around 6-7% pa.

We think that the recent surges in a wide range of metal prices during 2017 are worth focusing on, particularly as copper has featured strongly. Many investors still view the ‘red metal’ as an early warning indicator that future inflation may pick up from its current depressed levels.

When looking at interest rate cycles we are always slightly wary of adopting an overly bearish view of the bond market. It is true that interest rates have declined massively over the last 3 decades and further US Rates rises may occur this year and next. However, these are likely to be small in magnitude, and have been well telegraphed to the bond market.  We are also conscious that investors may perhaps need to remember that although the Federal Reserve may wish to return to a period of more normal rates, by reducing slightly their bond buying support program, possibly in September of this year, interest rates are still likely to remain near their historic lows.

We are often asked what is causing such low Interest rates and there are of course several reasons for this, not least the fall-out from the 2007/8 great financial crash and the subsequent monetary support program from Central Banks though-out the globe. The other often quoted reasons include low birth rates in the West, the increasing number of Pensioners switching to bond based investments and the impact of efficient technology and just in time supply chains.

But in our view, one of the largest factors which may well be causing low inflation is the fact that several sectors have too many operators. For example, if you have recently searched for a contractor to carry out some building work on your home, you will soon realise that low interest rates has helped to keep many barely profitable operators in business. All things being equal, if there was a fresh credit crunch and the 10 local building contractors shrunk to just 4, we might soon see large increases in their prices as soon as a slight recovery takes hold.

In summary, we believe that investors should not be lulled into a false sense of security that low inflation will remain for many years to come.