The coronavirus pandemic induced recession will drag global GDP lower by 3 percent in 2020 and most expectations are for a sluggish rebound in 2021.

However, the Speaker’s chart shows that there is a tendency for growth to rebound to 4 percent on an annual rate of change basis after a sharp plunge in activity. He thinks that is possible by the first or second quarter of next year. Despite an outsized economic loss which may take longer to recover, the corollary is the headline figure will lift growth expectations and be positive for commodities.

Source: World Bank

“A decade long commodity bear market is causing supply destruction across the commodity complex. Meanwhile, the demand hit because of the pandemic is only going to be temporary,” the Speaker added. “On the other side of this, industrial GDP will be higher given services has shrunk while commodity markets will be tighter. This is bullish.”

He sees this dynamic already playing out. Oil is rallying first but won’t go very far because the supply constraint is “unnatural” and imposed by non-economic actors. Base metals will rise slower but move much higher. This is being reflected in equity markets. Energy stocks are up 70 percent from the March lows. Metals and mining stocks are up 50 percent, on average. The top performing benchmark, Nasdaq, is up 40 percent. 

One of the participants noted that the primary reason for the commodity bear market and lack of goods inflation over the past decade is because the dollar has been in a strong bull market. “Would you need to see the dollar weaken for commodities to get a sustainable lift?” he asked.

The Speaker said that the fundamental supply tightening is unlike we have seen in the 40s and 70s, so a stronger dollar should not matter. And if the dollar weakens, the tailwind may just accelerate upside in commodities and lead to more protracted inflation.

The relative value of real assets to financial assets is highly correlated with inflation (84 percent since 1970), which means commodities may continue to outperform in the decade ahead. “Commodity markets have never been so interesting in my career,” he concluded, rubbing his hands together excitedly.

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