Here's What Lumber And Copper Are Telling Us About Inflation 

 | Aug 31, 2020 23:58

This article was written exclusively for Investing.com

  • Lumber rises to a new record high
  • Copper probes beyond $3 per pound
  • Inflationary pressures already brewing in the commodities market

Interest rates worldwide are at the lowest levels in history. Central banks and governments have been stimulating the global economy with unprecedented liquidity and establishing programs to stabilize economic conditions during the worldwide pandemic.

Deficits are rising as borrowing to fund the stimulus hits record levels. The US government borrowed $530 billion from June through September 2008 during the global financial crisis.

In May 2020, the US Treasury borrowed $3 trillion. And more borrowing is on the horizon.

The tidal wave of liquidity pouring into the global financial system comes at a price. It weighs on the value of fiat currencies that derive their worth from the full faith and credit of the governments that issue the legal tender. As the purchasing power of currencies declines, inflationary pressures are beginning to appear. Last week, the Fed Chairman told markets that the central bank is willing to allow inflation to rise above its 2% target rate.

Lumber and copper are two critical industrial commodities, and the price action in wood and the red metal is telling us that inflation may not only be on the horizon, but that it has already arrived.

Since reaching lows in late March and April, lumber and copper futures prices have exploded to the upside. Lumber has traded to a series of all-time peaks in August, and copper probed above the $3 per pound level for the first time since mid-2018.

h2 Lumber rises to a new record high/h2

Lumber futures are not liquid. I have been trading commodities for four decades and have held long and short positions in most commodities futures markets in the UK, Europe, and around the globe. However, I have never ventured into the lumber futures arena because of its lack of volume and open interest.

Illiquid markets can gap to the up- and down-side. They can be roach motels when the price moves against a trader, meaning that one can get into a risk position, but exiting can be another, more painful story.

While I do not trade lumber, I watch the price of the industrial product like a hawk. Lumber prices provide insight into the state of the US and global economies. Lumber is highly sensitive to interest rates. New home building or infrastructure projects increase the demand for wood. Economic contraction or risk-off periods often send the price significantly lower.

After trading to an all-time high of $659 per 1,000 board feet in May 2018, the price of lumber tanked and fell to a low of $251.50 in late March and early April 2020 on the back of risk-off conditions created by the global pandemic.