As traders or investors, we would like to believe that market prices fluctuate solely based on supply and demand logic. In other words, we want the markets to make mathematical sense according to the fundamental landscape. Yet, as we have been reminded, the math doesn’t always have to math. It isn’t only meme stocks or even AI stocks that can reprice for no other reason than the asset is going up, and market participants focused on FOMO are willing to jump on the bandwagon. In commodities, the rallies can also be exacerbated by the need for investors to hedge inflation risk. It isn’t possible to buy the CPI, but it is possible to buy the commodities believed to influence it. We’ve seen it in the wheat, oil, and natural gas markets after Russia invaded Ukraine. Each of these commodities eventually suffered the consequences of overzealous speculation.
Today, we see some of the same price chasing and inflation hedging in certain commodities, but the narrative is behind the curtains rather than out in the open. Because of this, it probably won’t see the same exuberance we saw in 2022. Further, those who bought into the inflation hedge narrative and were burned by ill-timed buys in leading commodity rallies will likely opt to sit this one out. Nevertheless, investors’ attempt to hedge their inflation risk by allocating funds to commodities is an inflation driver! See the charts we shared with Jim Cramer on Mad Money below.
