A surge of interest in fund managers is driving metal prices to new highs

A flurry of speculation by traders in futures markets has 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.

Copper has risen 30% since early March to break through $11,000 a tonne this week, its highest level ever. That helped lift prices of other industrial metals from aluminum to zinc.

Brisk buying by investors also pushed gold past its previous highs to $2,450 a troy ounce, and silver followed suit, topping $30 an ounce for the first time in a decade.

There has been a “serious influx of investment” into metals from algorithmic traders, specialist commodity investors and macro funds, said Greg Shearer, head of base and precious metals strategy at JPMorgan.

Movements in metal prices often defy traders’ expectations. Last year, strong demand helped deplete inventories to historic lows, but prices fell nonetheless. Prices have risen this year even as supplies improve.

Commodities’ share of global markets, meanwhile, shrank, falling to 2 percent in the past 12 months from 8.8 percent in 2009, according to Bloomberg data, as stocks and bonds raced ahead.

“The market was kind of ignoring everything from a fundamental perspective,” said Ricardo Leiman, chief investment officer at KLI Asset Management, a London-based commodities investment manager.

Analysts said the moves were driven by a jump in open interest – the number of open futures positions and the depth of the market.

Open interest in the base and precious metals markets hit record highs of $227 billion and $215 billion, respectively, last week, according to analysis by JPMorgan.

This largely consists of funds that close out their bets on falling prices and those that take long positions to profit from price movements, rather than producers or consumers hedging against the risk of price movements when they buy or sell commodities, analysts said.

Investor net long positions on the Comex and LME for base metals were 2.6 million tonnes in mid-May, up from 556,000 tonnes in early March, eclipsing the previous peak in late 2020.

The wave of money hitting metals is coming not only from momentum-driven algorithmic traders, but also from macro hedge funds that are increasing their allocations to real assets and specialty commodity hedge funds, analysts said.

Copper, which is most important for the decarbonization process, led to the surge in prices. Shearer said a “very difficult supply picture to correct” was at the heart of copper’s rally.

“For copper, the supply-tightening picture multiplies the possibilities [artificial intelligence] The pick-up in demand and greater comfort that we are at an inflection point for global demand, plus inflation hedging, were powerful drivers,” he said. “This has led many funds to say ‘now is the time for copper’.”

You are viewing a snapshot of an interactive graphic. This is most likely because you are offline or JavaScript is disabled in your browser.

Other base metals such as zinc, aluminum and lead followed copper, jumping between 15% and 28% since early April in a sharp collective rally.

Aline Carnisello, managing partner of Frontier Commodities, a start-up commodities investment firm, said investors are looking to diversify their returns away from big technology stocks by turning to metals.

Funds put money behind commodities to expose themselves to “decarbonisation, deglobalisation, hedging against inflation and geopolitical risks, as well as underinvestment in new supplies, particularly energy”, she said.

Inflows to broad-basket commodity funds – including grains, minerals, metals, cotton and cocoa – have been rising in the past few months, more than doubling in April to £1.9bn, according to Morningstar data.

Despite weaker-than-expected demand in China and a rapid build-up in metal inventories, there are signs that global production is finally turning a corner, which has also helped boost interest in silver given its widespread use in solar panels. China’s purchasing managers’ index expanded for a second straight month in April after half a year of contraction.

Australian mining group BHP’s £34 billion approach to buy rival Anglo American to secure its coveted copper mines in Latin America also sent a further signal to investors to grab the red metal, investors said.

“The takeover of BHP woke up a lot of people that it’s a lot cheaper to buy a company than to build a new mine,” Layman said. “It made a lot of people back down and pro [computer-driven trend-following hedge funds] and some of the macro crowd to go long. There was a massive reorganization of the streams.’

A net 13 percent of global fund managers surveyed by Bank of America were overweight commodities in May, the most since April last year. The past three months saw the biggest increase in their allocation to commodities since August 2020, according to the survey.

Some leading hedge funds are beefing up their commodity trading teams to take advantage of volatility in the asset class. Family office BlueCrest Capital plans to expand the number of its trading teams, including in commodities, by 10% by the end of the year.

Commodities typically trade based on the current supply and demand situation, but Carnizzello said the growing role of speculative investors in the market means they are starting to trade based on the likely future picture.

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

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top