Commodity equities are difficult to invest in due to the cyclicality of commodity prices, a significant value driver. Over the years, macro economic factors impacting security of supply and consistency of demand caused cyclicality in commodity prices – the larger tHe shock to supply or demand, the wilder the swing in price. As a result of this, commodity producers used the futures market to secure selling prices relative to their cost while industrial fabricators took the other side of the trade to secure critical raw materials. In the first half of the last decade, yet another factor is increasingly impacting commodity prices; monetary policy. Financial investors reached for capital appreciation through the futures market. Exacerbating the direction and amplitude of commodity prices, financial investors have left us wondering what the correct commodity prices really are, where price discovery on the futures market between producers and fabricators stops, and that by financial investors starts. Our bedrock thesis is that production costs drive commodity prices in the long run. In the short run, the gap between marginal costs and spot commodity prices is heavily influenced by financial investors speculating on monetary policy, though we will never know the extent.
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