Rush of fund manager interest drives metals prices to fresh highs

A flurry of speculation by futures market traders has pushed prices of metals such as copper and gold to all-time highs, as funds bet on upcoming shortages in supplies and try to hedge against inflation.

Copper has rallied 30 per cent since the start of March to break through $11,000 per tonne this week, its highest level ever. That has helped lift the prices of other industrial metals from aluminium to zinc.

The rush of investor buying has also pushed gold through its previous records to hit $2,450 per troy ounce and silver has followed to exceed $30 per ounce for the first time in a decade.

There have been “stark investment inflows” into metals from algorithmic traders, specialist commodities investors and macro funds, said Greg Shearer, head of base and precious metals strategy at JPMorgan.

The moves in metals prices have frequently defied traders’ expectations. Last year strong demand helped deplete inventories to historic lows, yet prices dropped. This year, prices have rallied, even though supplies are improving.

Commodities’ share of global markets has been shrinking, meanwhile, dropping to 2 per cent over the past 12 months from 8.8 per cent in 2009, according to Bloomberg data, as equities and bonds have 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 surge in open interest — the number of open futures positions and depth of the market.

Open interest across base metals and precious metals markets reached record highs of $227bn and $215bn, respectively, last week, according to a JPMorgan analysis.

This largely consists of funds closing their bets on falling prices and those taking long positions to profit from price moves, rather than producers or consumers hedging against the risk of price movements when buying or selling commodities, analysts said.

Net investor long positions on Comex and the London Metal Exchange for base metals were 2.6mn tonnes in the middle of May, up from 556,000 tonnes at the beginning of March, eclipsing the previous high in late 2020.

The wave of money hitting metals has come not only from momentum-driven algorithmic traders but also from macro hedge funds boosting their allocation to real assets and specialised commodities hedge funds, analysts said.

Copper, which is the most vital to the process of decarbonisation, has led the surge in prices. Shearer said a “very hard to fix supply picture” underpinned copper’s rally.

“For copper, the tightening supply picture times the possible [artificial intelligence] demand uplift and more comfort that we’re at an inflection point for global demand, plus inflation hedging, has been a potent brew,” he said. “That has made a lot of funds say ‘now is the go-time for copper’.”

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Other base metals such as zinc, aluminium and lead have followed copper, jumping between 15 per cent and 28 per cent since the start of April in a sharp collective swing higher.

Aline Carnizelo, managing partner of Frontier Commodities, a newly established commodities investment vehicle, said investors wanted to diversify their returns beyond big technology stocks by turning to metals.

Funds are putting money behind commodities to get exposure to “decarbonisation, deglobalisation, a hedge against inflation and geopolitical risks as well as the under-investment in new supplies, particularly of energy”, she said.

Inflows to broad-basket commodities funds — including grains, minerals, metals, cottons 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 of metals stocks, there have been signs that global manufacturing is finally turning a corner, which has also helped fire up interest in silver, given its extensive use in solar panels. China’s purchasing managers’ index expanded for a second consecutive month in April after half a year of contraction.

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

“The BHP takeover woke up a lot of people that it is much cheaper to buy a company than building a new mine,” Leiman said. “It triggered a lot of people to unwind positions and for [computer-driven trend-following hedge funds] and some of the macro crowd to go long. There has been a massive reorganisation of flows.”

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

Some top hedge funds have been increasing their commodities trading teams to take advantage of the volatility in the asset class. Family office BlueCrest Capital is planning to expand its number of trading teams, including in commodities, by 10 per cent by the end of the year.

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

“It’s starting to get commodities to behave a bit like equities,” she said.