Is a Commodity Crash Coming Next After the Crypto Crash?

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May. 21 2021, Published 3:34 p.m. ET

Cryptocurrencies and commodities are the two asset classes that have given phenomenal returns over the last six months. There has been a crash in crypto assets since China barred its financial institutions from dealing with them. Commodities also have a strong China connection because the country is the biggest consumer of most commodities. Could a commodity crash be coming next after the crypto crash?

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First, we should understand that commodities and cryptos are both alternative assets. While commodities, especially gold, have been the ultimate diversification and store for value for old-timers, a lot of investors, especially Millennials, see cryptos as the “new gold.”

Crypto versus commodities

One of the reasons assets like cryptos and commodities have been rising over the last six months is the abundant liquidity in global markets. Second, since many people think that the rally in stocks is overdone, they have been looking at alternative assets. This is where commodities and cryptos filled the bill. Incidentally, over the last 90 days, Google searches for cryptos far exceed that of stocks in the U.S. 

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While old-timers like Warren Buffett don’t see any value in cryptos, commodities have a fundamental value. Apart from the liquidity-driven rally, strong underlying demand has been supporting commodity prices. 

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We are in a commodity supercycle

Commodity prices are cyclical in nature. Currently, we're in a commodity bull run that's fueled by strong demand globally. Also, while commodities faced an oversupply situation over the last decade, underinvestment in new projects during this period has meant that new supply isn't keeping pace with the current high demand. This especially holds true for some of the metals like copper. 

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Also, in some commodities like oil, producers are wary of increasing production in a hurry since it would pressure prices. While the OPEC+ block is increasing oil production, it's doing it gradually.

When will the commodity supercycle and bull run end?

Many people wonder when the commodity supercycle and bull run will end. There aren't any near-term triggers that could pull the plug for the rally. If anything, the fiscal and monetary policy extravaganza is expected to continue in the foreseeable future despite inflation and overheating fears. 

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Commodities aren't in a bubble.

Commodities don’t seem like they're in a bubble. The prices are being driven by a strong demand-supply equation. Looking at high raw material prices, the prices for finished metals like steel are also getting support. Copper is always susceptible to a supply-side shock since it's mainly mined in Latin America, which has a history of labor disputes for copper mining companies.

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Commodity prices might crash.

While commodities don’t look in a bubble per se, a rate hike or a steep rise in inflation could lead to a crash in prices. While central banks in developed countries were worried about low inflation over the last decade, they are now concerned about rapidly rising inflation.

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Should you invest in commodities?

Real assets like commodities tend to do well in an inflationary environment. Research shows energy being the best performer during periods of high inflation. Copper looks like another commodity worth betting on given the expected increase in demand from electric vehicle adoption. Also, copper supply might not keep pace with the increase in demand considering years of underinvestment.

Gold could be another commodity worth considering. Despite all of the talk about a booming economy, gold could help you hedge your portfolio against economic or geopolitical shock.

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