A series of speculative activities by traders in the futures market pushed the prices of metals such as copper and gold to historic highs as funds bet on impending supply shortages and try to hedge against inflation.

Since the beginning of March, copper prices have risen 30%, breaking $11,000 per ton this week, the highest level in history. This helped drive up the prices of other industrial metals, from aluminum to zinc.

Investors' rush to buy also pushed the price of gold to a new high, once rising to 2,450 US dollars per ounce, and the price of silver broke through 30 US dollars per ounce for the first time in 10 years.

Greg Shearer, head of base metals and precious metals strategy at J.P. Morgan Chase, said there is a “massive influx” of precious metals from algorithmic traders, professional commodity investors, and macro funds.

Metal price movements often exceed traders' expectations. Strong demand helped drain inventory to historic lows last year, but prices are still falling. This year, despite improvements in supply, prices quickly picked up.

Meanwhile, according to foreign media data, the share of commodities in the global market has been shrinking, from 8.8% in 2009 to 2% in the past 12 months, with stocks and bonds leading the way.

Ricardo Leiman, chief investment officer at KLI Asset Management, a London-based commodity investment management company, said, “From a fundamental point of view, the market is a bit ignoring everything.”

Analysts said these trends were driven by a surge in position volume. According to an analysis by J.P. Morgan Chase, open positions in the base metals and precious metals markets reached record levels of $227 billion and $215 billion, respectively, last week.

Analysts said this is mainly driven by funds closing short positions and those who hold long positions to profit from price fluctuations, rather than producers or consumers hedging the risk of price fluctuations when trading commodities.

In mid-May, Comex and the London Metal Exchange had net long positions on basic metals of 2.6 million tons, up from 556,000 tons at the beginning of March, and surpassing the previous high at the end of 2020.

Analysts said that the financial wave driving the rise of metals comes not only from automated volume-driven algorithmic traders, but also from macro-hedge funds and professional commodity hedge funds that have increased the allocation of real assets.

Copper is the most important raw material in the decarbonization process and is the main reason for the sharp rise in copper prices. Shearer said that “it is difficult to determine the supply situation” has supported the rise in copper prices.

He said, “For copper, tight supply combined with a possible increase 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 base metals, such as zinc, aluminum, and lead, followed by copper, and have collectively risen sharply by 15% to 28% since the beginning of April.

Aline Carnizelo, managing partner of Frontier Commodities, a newly established commodity investment tool, said investors wanted to diversify investment returns by switching to metals, not just large tech stocks.

She said funds are investing in commodities to gain “exposure to decarbonization, de-globalization, hedging inflation and geopolitical risks, and underinvestment in new supplies (particularly energy).”

According to Morningstar's data, capital inflows into general commodity funds, which include grains, minerals, metals, cotton, and cocoa, have been increasing over the past few months, and more than doubled to £1.9 billion in April.

There are signs that the global manufacturing industry is finally starting to improve. Given that silver is widely used in solar panels, this has also spurred interest in silver.

Investors said Australian mining group BHP Billiton bought rival Anglo-American Resources Group for £34 billion to secure its coveted copper mine in Latin America, which also sent a further signal to investors that they could snap up copper.

“BHP Billiton made many people realize that buying a company is much cheaper than developing a new mine,” Leiman said. “This has triggered many people to close short positions, let computer-driven hedge funds follow trends, and some macro traders go long, and capital flows have been restructured on a large scale.”

In May, a net 13% of global fund managers surveyed by Bank of America increased their commodity holdings, the highest level since April last year. According to the survey, over the past three months, their commodity allocation increased by the biggest increase since August 2020.

Some of the top hedge funds have been expanding their commodity trading teams to take advantage of the volatility of this asset class. Family finance office BlueCrest Capital plans to increase the number of its trading team (including commodity trading teams) by 10% by the end of this year.

Commodities are generally traded based on current supply and demand conditions, but Carnizelo said speculative investors are playing an increasing role in the market, which means they are starting to trade based on possible future prospects. She said, “This is starting to make commodities perform a little like stocks.”