Real Assets
30 Years of U.S. Money Supply and Interest Rates
30 Years of U.S. Money Supply and Interest Rates
Money supply and interest rates are important macroeconomic factors that can change the direction of entire economies.
In the United States, the Federal Reserve, also known as the Fed, uses open market operations to influence these factors and fulfill its “dual mandate” of maximum employment and stable prices.
But how is money supply associated with interest rates?
How Money Supply Affects Interest Rates
Interest rates determine the cost of borrowing money in an economy. The higher the interest rate, the more expensive it is to borrow money, and vice versa.
By the law of supply, when there is less money in the economy, the cost of borrowing money tends to be higher. All else being equal, a decrease in money supply corresponds to higher interest rates, and by contrast, an increase in money supply tends to put downward pressure on interest rates.
Central banks use monetary policy—the macroeconomic policy that manages interest rates and money supply—to improve economic health. However, the nature of the monetary policy differs based on the state of the economy:
- Expansionary Monetary Policy
Expansionary monetary policies aim to stimulate economic growth by increasing the money supply, lowering interest rates, and increasing demand, spending, and investment in the economy. - Contractionary Monetary Policy
Contractionary policies aim to slow down unsustainable economic growth and inflation by decreasing the money supply, increasing interest rates, and reducing spending while facilitating saving.
Today, the U.S. Fed is employing expansionary monetary policy, with near-zero interest rates and some of the fastest growth rates for M3 money supply ever seen.
But how has the Fed’s monetary policy changed over recent decades?
Economic Booms and Busts in the U.S.
Between 1990 and 2020, the U.S. money supply (M3) increased from around $3 trillion to $19 trillion, a rate that far exceeds that of economic growth.
During this time, the U.S. economy went through major shocks that affected its monetary policy.
The 2001 Recession
Internet and tech-based companies came to dominate the U.S. economy by the end of the 1990s.
During the same period, the Fed eased its monetary policy, with the goal of reducing interest rates and increasing liquidity in the economy. Excess money supply also went into the stock market, propelling the NASDAQ index to new highs at the time.
To curtail rising inflationary pressures and an overheating stock market, the Fed raised its Fed funds rate target six times between June 1999 and May 2000, reducing money supply growth. This, in turn, slowed down the flow of capital into the stock market in the lead-up to the dot-com crash and the recession that followed.
The 2008 Financial Crisis
The 2008 recession was the most severe economic downturn in the U.S. since World War II.
In an effort to spur the economy out of recession, the Fed dropped its rate target from 3.5% in January of 2008 to near-zero rates by the end of the year. Additionally, it also started a series of large-scale asset purchase programs (also known as quantitative easing), accelerating money supply in the economy.
From the end of 2008 to 2015, the Federal Open Market Committee (FOMC) established near-zero targets for the Fed funds rate in order to support economic activity and job creation.
The 2020 Recession
The pandemic-induced recession of 2020 called for policymakers and central banks around the world to take action.
In response to the financial turmoil, the FOMC dropped its Fed funds rate target by 1.5 percentage points to a range of 0% to 0.25%. It expects these near-zero interest rates to stay until 2023. Furthermore, at the end of 2020, M3 money supply was up by almost 25% year-over-year, the largest yearly increase since 1961.
The Fed’s response to economic turmoil involves large changes in money supply and the Fed funds rate, which affects not only the short term but also the long-term direction of the economy.
The Future of U.S. Money and Interest Rates
An economy’s money supply has a strong association with the currency’s purchasing power and inflation, although there are other factors at play. As the number of dollars in the economy increases, the amount of goods and services that can be bought with one dollar falls as price levels rise.
Due to the policy response during the pandemic, inflation has become a growing concern for investors and consumers alike. With money supply at unprecedented highs and interest rates near all-time lows, it’ll be interesting to see how long it takes for the U.S. economy to recover and rates to rise again.
Real Assets
The Periodic Table of Commodity Returns (2013-2022)
This table shows the fluctuating returns for various commodities over the past decade, from energy fuels to industrial and precious metals.
The Periodic Table of Commodity Returns (2013-2022)
Trying to predict which commodities will come out on top in any given year is tricky business—especially during this turbulent period in markets.
By looking back at previous years, investors can gain insights into long-term trends and patterns in commodity prices. To help better understand these trends, U.S. Global Investors releases a visualization called the Periodic Table of Commodity Returns at the outset of each year.
This year’s edition looks back over the past decade of returns between 2013 and 2022, and features an interactive design that allows users to sort returns by various categories including returns, volatility, and other groupings.
Editor’s note: Because of the Russia-Ukraine conflict, regional benchmarks for some commodities (coal, natural gas) had much bigger price divergences than is typical. In this case the graphic focuses in on U.S. regional benchmarks like Powder River Basin coal and Henry Hub natural gas prices. These prices may differ from price action seen around the world.
More Volatility, but Positive Returns
After 2021 saw an impressive surge in commodity prices as the world reopened post-pandemic, 2022 brought another year of positive returns for the asset class that were defined by high levels of volatility.
The broad-based S&P Goldman Sachs Commodity Index (GSCI) surged 52.1% in the first five months of 2022, as supply disruptions and fears across grains, metals, and energy fuels were spurred by Russia’s invasion of Ukraine.
The second half of the year saw prices cool as the U.S. continued to release crude oil from its strategic petroleum reserve while Russia and Ukraine established an agreement to enable grain and agricultural exports, quelling fears of extended supply disruptions.
The result? In the last seven months of the year the S&P GSCI nearly completed a return trip and only ended up rising 8.7% in 2022 overall.
| Commodity | 2022 Returns |
|---|---|
| Lithium | 72.49% |
| Nickel | 43.13% |
| Natural Gas (Henry Hub) | 19.97% |
| Corn | 14.37% |
| Platinum | 10.90% |
| S&P Goldman Sachs Commodity Index (GSCI) | 8.71% |
| Crude oil | 6.71% |
| Silver | 2.77% |
| Wheat | 2.76% |
| Lead | -0.05% |
| Gold | -0.28% |
| Palladium | -5.89% |
| Copper | -14.13% |
| Aluminum | -16.27% |
| Zinc | -16.34% |
| Coal (PRB) | -48.34% |
Another key factor that helped keep commodity prices cool in 2022 was China’s extended lockdowns which slowed down the country’s manufacturing and industrial capabilities. This helped reduce the demand of energy fuels in 2022, along with industrial metals like copper, aluminum, and zinc.
Lithium Continues to Top Commodity Returns
A metal that did shine brightly in 2022 was lithium, which has been newly added to the Periodic Table of Commodity Returns.
After topping the table in 2021 with an outsized price increase of 442.8%, lithium kept its top spot in 2022 with a more modest price increase of 72.5%.
The growing global push towards electric vehicles (EVs) has been a major contributor to the increase in demand for lithium and nickel, which was the second-best performing commodity in 2022 with a price increase of 43.1%. As more countries set targets to phase out gasoline and diesel vehicles, demand for key battery minerals like lithium and nickel is expected to continue to rise.
While the U.S. is working to strengthen its battery metals production and supply chains with $2.8 billion in grants for domestic lithium, graphite, and nickel projects, it will be years before more supply comes online as a result. In the meantime, robust demand for EVs in China has provided a constant need for these battery metals which are currently in short supply.
Energy Price Variance Fueled by Regional Uncertainty
After 2021 saw energy fuels dominate the top spots after lithium, energy fuel prices in 2022 were more volatile with more scattered returns. Natural gas was the only fuel which saw double-digit returns at a 19.9%, with crude oil returning 6.7% and coal at the bottom of the table at -48.3%.
It’s important to keep in mind how geopolitical events and supply disruptions last year affected the regional price differences for energy fuels. While WTI crude oil (North America’s benchmark) increased by 6.7% in 2022, Brent crude oil (Europe’s benchmark) was up 10.4% as Urals crude oil (Russia’s benchmark) fell by more than 26.5%.
| Type of Crude Oil | 2022 Returns | Price in U.S. dollars (Jan 17, 2023) |
|---|---|---|
| Brent Crude Oil (European benchmark) | 10.35% | $86.72 |
| WTI Crude Oil (North American benchmark) | 6.72% | $81.01 |
| Urals Crude Oil (Russian benchmark) | -26.53% | $55.60 |
As a result of the war and ensuing sanctions, the discount of Urals crude oil compared to Brent crude oil went from -$1.72 at the start of 2022 all the way to -$30.71 by the end of the year.
Thermal coal prices faced similar regional divergences, with Powder River Basin (PRB) coal (America’s benchmark for coal) falling by 48.3% this year while Newcastle coal, which is delivered out of the port of Newcastle, Australia primarily to various Asian nations, saw prices skyrocket up by 156.6% in 2022.
After such a wild year with huge variance in commodity prices, we’ll see if 2023 can bring some stability or if high volatility and growing regional price discrepancies will become the norm.
Real Assets
The Top 10 Best and Worst-Performing Commodities of 2022
The year 2022 was full of volatility for commodity prices. This infographic charts the top 10 best and worst commodities by returns in 2022.
Top 10 Best and Worst-Performing Commodities of 2022
Hard commodities had a roller coaster year in 2022.
While prices for some commodities stabilized after skyrocketing on the heels of the pandemic, others delivered stellar returns. Behind the volatility was a plethora of factors, including the Russia-Ukraine war, the global economic slump, and a drop in China’s demand for materials.
This chart uses price data from TradingEconomics to highlight the 10 best and worst performing hard commodities of 2022. It excludes soft commodities like agricultural products and meat.
Energy Crisis Sets Coal on Fire
The global economic rebound of 2021, which set the fastest post-recession growth pace in the last 80 years, sparked coal prices as energy demand increased. Russia’s invasion of Ukraine ignited the spark, with coal prices exploding 157% in 2022.
Consequently, coal was the best performing commodity in 2022, far outperforming the other nine top commodities by returns.
| Rank | Commodity | 2022 Returns |
|---|---|---|
| #1 | Coal | 157% |
| #2 | Lithium | 87% |
| #3 | Nickel | 43% |
| #4 | Titanium | 27% |
| #5 | Heating oil | 21% |
| #6 | Uranium | 12% |
| #7 | Platinum | 9% |
| #8 | Molybdenum | 4% |
| #9 | Iron ore | 1% |
| #10 | Gold | 1% |
Lithium (carbonate) and nickel prices continue to be supercharged by the demand for EVs and batteries. Since the beginning of 2021, lithium prices have increased 11-fold, and remain elevated at more than $70,000 per tonne.
As a result of high prices for lithium, nickel, and other battery metals, the average cost of lithium-ion battery packs increased in 2022, for the first time since 2010. Battery pack prices are expected to increase in 2023 as well, before falling in 2024.
The year was also positive for uranium as countries revived their nuclear power plans to combat the energy crunch. Notably, Germany extended the lifetime of three plants that were set to shut down in 2022, and Japan announced accelerated restarts for several idle reactors.
What About Crude Oil?
Crude oil is by far the biggest commodity market, and oil prices were the talk of the town for much of 2022.
Following Russia’s invasion of Ukraine, WTI crude oil prices rose to their highest level since 2013 by May 2022. However, between June and the end of December, prices fell from around $116 per barrel to $80 per barrel (a 31% fall). Overall, in 2022, crude oil delivered a -3% return.
The erasure of oil’s initial gains can be attributed to the slowdown in economic growth globally, in addition to strict COVID-19 lockdowns in China.
The 10 Biggest Commodity Drawdowns
The negative returns for most commodities can be largely attributed to prices stabilizing at lower levels after bullish runs in 2021 and the beginning of 2022.
| Rank | Commodity | 2022 Returns |
|---|---|---|
| #1 | Magnesium | -54% |
| #2 | Tin | -37% |
| #3 | Propane | -37% |
| #4 | Rubber | -26% |
| #5 | Cobalt | -26% |
| #6 | Natural Gas TTF | -20% |
| #7 | Naphtha | -19% |
| #8 | Zinc | -18% |
| #9 | Copper | -16% |
| #10 | Aluminum | -16% |
For example, magnesium prices more than halved in 2022, declining from an all-time high in September 2021. Similarly, tin prices also normalized after rising due to unprecedented demand from the electronics sector during the economic rebound from the pandemic.
The volatility in European natural gas (TTF gas) was one of the highlights of the year. Prices rose to around €340 per megawatt-hour in August as the region looked to cut its reliance on Russia. However, they have since fallen due to milder temperatures in winter and the overall drop in energy demand. Still, on average, TTF prices were 150% higher in 2022 than in 2021.
Copper prices are known to reflect the state of the global economy. It’s safe to say that they did so in 2022, falling 16% as economic growth slowed down and China’s economic activity came to a halt at various times due to Zero-COVID policies.
How Will Commodities Perform in 2023?
According to Goldman Sachs, commodity markets have a bullish outlook for 2023, mainly due to underinvestment and the lack of supply response in 2022.
Rising interest rates worldwide increased the cost of capital in 2022, which drained money from commodity markets. Therefore, supply shortages are expected to persist. As China reopens and eases its lockdown measures, the demand for hard commodities is likely to rebound, putting upward pressure on prices.
J.P. Morgan has similar expectations. The bank expects oil prices to rise due to an increase in demand but projects a “transitional year” for base metals, with prices expected to remain relatively stable. The outlook for precious metals is more positive, with gold prices expected to hover around $1,860 per ounce towards the end of 2023.
Of course, commodity markets are volatile. With various geopolitical and macroeconomic moving parts, it’ll be interesting to see what this year has in store for fuels and metals.
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