Finance Association, May 22 (Editor: Xiaoxiang) In the past few months, perhaps the most impressive market in the global financial market is the “Periodic Table of Elements” market, which you just sang to launch in the commodity market.

The speculative boom of futures market traders has pushed the prices of metals such as copper and gold to historic highs, as many fund managers are either betting that these metals will face a shortage of supply or are trying to hedge against the risk of inflation.

Market data shows that since the beginning of March, copper prices have increased by more than 30%. This week, LME copper surpassed 11,000 US dollars per ton, a record high. This wave of gains has also led to a rise in the prices of other industrial metals, from aluminum to zinc.

At the same time, investors' rush to buy also helped gold break the previous record high, reaching 2,450 US dollars per ounce. Silver also rose, rising above $30 an ounce for the first time in ten years.

Greg Shearer, head of basic metals and precious metals strategy at J.P. Morgan Chase, said that both programmatic traders, professional commodity investors, and macro funds are currently pouring into the metals market.

It is worth mentioning that historically, metal price trends have often gone against traders' expectations. Last year, strong demand helped push metal inventories down to historic lows, but prices fell. And this year it's the other way around, and while supply is improving, prices have risen sharply...

Meanwhile, the share of commodities in the global market has actually been shrinking in recent years. According to industry data, the share of commodities in the global market has declined from 8.8% in 2009 to 2% in the past 12 months, as stocks and bonds have always been far ahead in the global market share.

As a result, in response to the current “abnormal” boom in the commodity market, especially the metals market, Ricardo Leiman, chief investment officer of KLI Asset Management, a London commodity investment management company, said, “From a fundamental point of view, the market seems to be ignoring all of the above.”

The number of open positions has surged

Many analysts say that the current changes in the metals market are driven by a surge in open positions.

According to J.P. Morgan's analysis, open positions in the basic metals and precious metals markets reached a record high of $227 billion and $215 billion, respectively, last week.

Analysts say most of these open positions come from institutional investors trying to profit from fluctuations in metal prices, rather than producers or consumers hedging when buying or selling products. The capital flowing into the metals market comes not only from momentum-driven programmatic transactions, but also from macro-hedge funds and specialty commodity hedge funds that increase the allocation of real assets.

According to the data, as of mid-May, COMEX and LME's net long positions in basic metals had reached 2.6 million tons, a sharp increase from 556,000 tons in early March, and surpassing the previous high at the end of 2020.

As the most critical metal in the decarbonization process, copper has led to this round of price increases. And behind the rise in copper prices, the wave of emptying centered around the New York market is unquestionably particularly aggressive.

Shearer said, “For copper, tight supply combined with potential increases in demand (artificial intelligence), and our increased confidence that global demand is at an inflection point, combined with inflation hedging, has formed a powerful force. This has led many funds to say 'now is a good time to buy copper'.”

Other basic metals — such as zinc, aluminum, and lead — have also followed the collective sharp rise in copper prices, which have generally risen by 15% to 28% since the beginning of April.

Diversified configuration options

Aline Carnizelo, a partner at commodity investment agency Frontier Commodities, said investors are hoping to diversify earnings by switching to investing in metals rather than relying only on large technology stocks in the stock market as before.

She said that there are undoubtedly many benefits of hedge funds investing in products right now, including being able to obtain targets for decarbonization and de-globalization; hedging inflation and geopolitical risks; and making up for insufficient investment in new supplies (especially energy supplies).

According to Morningstar data, capital inflows to a basket of commodity funds, which include grains, minerals, metals, cotton, and cocoa, have been rising over the past few months, more than doubling to £1.9 billion in April.

Fundamentally, despite the rapid increase in silver inventories, signs that the global manufacturing industry is finally improving are also fueling people's interest in silver — silver is widely used in solar panels.

Mining giant BHP Billiton bought rival Anglo-American Resources Group for 34 billion pounds in an attempt to obtain news of its coveted copper mine in Latin America, and sent a further signal to investors to buy “Dr. Copper.”

Leiman said, “BHP Billiton's acquisition has awakened many people to realise that buying a company is much cheaper than building a new mine. This has prompted algorithm-driven trend tracking funds and some macro players to go long. There has been a huge shift in financial flows.”

According to Bank of America's fund manager survey, 13% of fund managers surveyed in May were overinvesting commodities, the highest percentage since April last year. According to the survey, in the past three months, fund managers' allocation to commodities increased the most since August 2020.

Some of the top hedge funds are increasing the size of their commodity trading teams to try to take full advantage of the volatility of this asset class. The family office BlueCrest Capital is planning to expand its trading team — including the commodities trading team — by 10% before the end of the year.

Although commodities are traditionally traded based on their current supply and demand situation, Carnizelo said the increasing role of speculative investors in the market means that the sector is beginning to switch to trading based on what might happen in the future.

“Commodities are starting to perform a bit like stocks,” she said.