Metals - The path to inflation.

Many folk are debating whether the bounce in stocks is just a bounce or if a base is in. Many more are also in fevered debate over the intricacies of whether there are hints of slowdowns in deflation in country data. Meanwhile an elephant is lumbering around the room unnoticed, helping itself to their sandwiches. Metals. The rise in the price of metals has been continuing quietly for a while now, but for those of you who haven't been watching here's a charty catch up 

Iron

Nickel 

Zinc

And finally my friend Dr. Copper who has not disappointed in accelerating upwards through the resistance levels previously highlighted. 

Oh, and lets throw in Oil while we are at it for chart comparison purposes  

The moves in many started last year and a few of them only blinked in the great February sell off that was portending global doom. Country specific responses have been quietly on the move too. Whilst we were all focused on European banks, recessionary fears and the path of US interest rates the likes of Peru have shrugged off all of the things that would normally see it cratering and has been rallying strongly since January leaving it handsomely up on the year. Below is the Peruvian (coppertastic) market ETF - 'EPU'. there are a few Developed Markets that would give their eye teeth for a 15% up performance on the year. (In fact the whole of Latam is going great guns).

Metals are clearly telling us that this is more than a dead cat bounce in the growth story. Price rises in commodities have always been the root of all evil, when inflation was evil, but it is not now - inflation is the holy grail. So follow metals closely.

Commodity prices have always had a feedback loop that reinforces their direction. Prices start to rise on real demand and those rises push up inflation. What do you buy when you expect inflation? Commodities. And off we go in a 2005+ price push sucking in speculators and inflation hedgers.

In a negative interest rate world metals get another boost. the cost of holding them vs cash is dramatically reduced. Whilst many see gold as the escape route from negative yielding cash don't forget that any old metal will do. we are escaping negative rates not the end of the world in this scenario and so the requirement to carry your total wealth sewn into the lining of your coat or buried in your garden is bypassed. Whether you buy an ounce of gold or a ton of nickel is immaterial.

The transmission of Negative Interest Rate Policy is mostly discussed in the context of 'encouraging' banks to lend and companies to borrow and spend which will ultimately lead to inflation. But that isn't the only route. In a negative interest rate world metals get another boost as the cost of holding them vs cash is dramatically reduced. Whilst many see gold as the escape route from negative yielding cash, don't forget that any old metal will do. As we are escaping negative rates, rather than the end of the world, the requirement to carry your total wealth sewn into the lining of your coat or buried in your garden is also negated. Whether you buy an ounce of gold or a ton of nickel is immaterial.

So I would suggest that the direct path to inflation will be through the rising price of raw materials and as soon as that is sniffed speculative flows will bring it on all the faster.

It is also worth noting that the prices above are in USD terms. In the UK or Europe where the USD has been rallying, the inflationary impact is even sharper. With so much riding on the next ECB meeting with regards to policy easing, the risk for disappointment is only hightened.