Reflation Hopes Take Copper to 9-Year High; Gold Back Above $1800

By Barani Krishnan

Investing.com - Copper prices skyrocketed to near-year highs above $9,000 a tonne or $4 a lb, while gold returned to its previous berth of $1,800 an ounce on Monday on hopes for a “reflation” of the U.S. economy from President Joe Biden’s upcoming $1.9 Covid-19 stimulus.

Reflation is a fiscal or monetary policy designed to expand output, stimulate spending, and curb the effects of deflation, which usually occurs after a period of economic uncertainty or a recession.

It’s also used at times to describe the first phase of economic recovery after a period of contraction. The dollar typically weakens in periods like this, boosting prices of commodities in what’s known as the “reflation trade."

The Dollar Index, benchmark against six major currencies, hit a six-week low of 89.98 while the U.S. 10-year Treasury yield spiked to a one-year high. Aside from the rally in copper and gold, silver jumped to six-month highs and oil rebounded from a selloff on Friday.

“Commodities rise on (the) reflation trade,” Yohay Elam said in a blog on ForexLive. “Investors are awaiting what President Joe Biden and fellow Democrats pass in Congress – up to $1.9 trillion in Covid relief – and what they might do afterward. The administration is considering vast infrastructure spending.”

Copper, often seen as a measure of the global economy, has rallied almost without stop for a year now, largely on support from top metals buyer China, which emerged from Covid-19 lockdowns way before the rest of the world.

In Monday’s session, three-month copper on the London Metal Exchange peaked at $9,271.50 a tonne, its highest since September 2011, when it soared to 9,240.50. On New York’s Comex, U.S. copper for May delivery touched $4.22 a lb, its loftiest level since an August 2011 high of $4.50.

Gold for April delivery on Comex settled up $31, or 1.7%, at $1,808.40 per ounce. Last week, gold tumbled 2.5%, reaching below $1,760, its lowest since June.

Comex silver for March settled up 83 cents, or 3%, at $28.09 per ounce, after soaring to $30.31, its highest since August. Silver typically rises and falls with gold, though demand for the metal’s wide industrial uses could also see it breaking out on infrastructure plans announced by the Biden administration.

Despite its obvious standing as an inflation hedge and safe-haven against most economic and political troubles, gold prices have crumbled since hitting record highs of nearly $2,090 an ounce. The decline has been persistent from November, after vaccine breakthroughs for the Covid-19 often raised unrealistic expectations for economic recovery from the pandemic.

The Dollar Index gained at the expense of gold during most of these three months, assisted by the spike in the 10-year Treasury yield. Gold, which is supposed to be an inflation hedge, suffered a series of setbacks.

This was despite Biden’s forthcoming stimulus of nearly $2 trillion, which comes after the near $4 trillion issued under his predecessor Donald Trump, adding to the potential of the U.S. fiscal deficit and debt that should weigh on the dollar.