Long-run commodity prices - it is all about cycles

Inflation is high relative to past few decades, but there will be mean reversion and many commodities which have risen significantly will revert to the mean. While many think of commodities as an inflation hedge, it is important to review the long-term cyclical nature of commodity prices. For many commodities, the increases over the last two years are market specific.

We can focus our attention on three commodities, crude oil, copper, and wheat. The three charts are in log scale. The speed of the oil increase was unprecedented, prices are well below the extremes even after the GFC, but these increases are related to returning demand and some production constraints. Copper prices are near all-time highs, but these levels are associated with the current demand for copper for the green revolution and the great build in China since 2000. Wheat prices are near highs from a decade ago based on weather shocks for key growing areas. 

Yes, inflation has caused prices to move higher, but much of the gains are market-specific. Making commodities an inflation trade will disappoint some investors.