Gold Forecast: Commodity Deflation and Wall Street’s Short Positions

Commodity deflation is the primary force driving Wall Street, according to Arlan Suderman, StoneX Chief Commodities Economist. Commodity deflation describes a general decline in the price of commodities and is generally associated with a contraction in the supply of money and credit in the economy. 

The Federal Reserve is combatting sticky inflation via higher rates; and rises in Treasury yields, according to the fund managers’ playbook, is to short commodities. 

Commodities typically perform differently to traditional asset classes, particularly when commodity price shocks are caused by unexpected changes in supply. In recent years, the wheat and oil disruption that followed the Russian invasion of Ukraine, or the extended shut down of Chinese manufacturing during the pandemic serve as prime examples.

Commodities historically display a positive inflation beta, meaning in times of rising inflation a strategic commodity position could offer protection across an overall portfolio.  

So, with the Federal Reserve heavily focused on combatting inflation through higher rates, the move to short commodities has a logic to it.  

Suderman, however, believes that “we will see that mantra flip later this year, absent a pop in inflation data”, a not entirely unrealistic circumstance given the historical propensity of inflation to arrive in waves. 

The Treasury Department is expected to offer over $10 trillion in debt certificates onto the market this year; $8.9 trillion of which will be maturing debt certificates requiring rolling at current interest rates, alongside a $1.14 trillion budget deficit for the current fiscal year that will require financing too. 

The Federal Reserve finds itself facing a difficult balancing act. 

On one hand, the housing sector is being hurt by the rise of Treasury yields, and Suderman anticipates the central bank pulling back on its quantitative tightening (QT) this year. 

On the other, doing so and returning to the policy of effective debt monetization, would be inflationary.

This report was written by Gus Farrow with permission from Arlan Suderman. Register for a free trial to StoneX Market Intelligence to read more of Arlan's analysis.