Evidence that inflation is reviving bodes well for commodity prices, according to the latest report from JP Morgan, which cites US wages data as well as recent core consumer price inflation.
“Rising inflation is beneficial for commodities,” the bank notes. “In fact, metals, both base and precious, exhibit their best performance (both outright and volatility-adjusted) when inflation has reached the [Federal Reserve’s] 2% target and continues rising.”
JP Morgan believes that bets on gains in precious metals, copper, zinc and nickel will probably result in the highest returns over one year. Assuming the present cycle will stretch beyond 2018, the current expansion is just beginning one of the strongest periods for metals prices broadly, it added.
Commodities rallied to their highest levels for more than two years in January and JPMorgan noted that raw materials tend to do well in the late stage of the economic cycle.
The bank expects copper to average $7,405 a metric ton this year, with its quarterly forecasts rising through 2018, according to its note. Three-month copper recently traded at $7,048 a ton on the London Metal Exchange.
JP Morgan’s outlook echoes that of miner and commodity trader Glencore, which in its annual results report noted “the potential of synchronised global economic growth, emerging inflation, supportive commodity fundamentals and the emerging electric-vehicle story suggest a positive outlook for commodities.”
Earlier this week, JP Morgan forecast that agriculture markets, the best performing commodities sector so far this year, are poised for further gains.
The bank added that sugar and wheat are among its bullish bets and that it was staying “constructive across the agri commodity complex” in price terms, even after a gain of 5% in values so far in 2018, driven by the establishment of “weather premiums… across grain and oilseed markets.”