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This commentary is intended for general informational purposes only and does not constitute investment advice or a recommendation.
While the Cantillon Effect, visualized in Chart 1, is rarely discussed in commodity investing, some may remember me talking about it and how it ties to inflation and pertains to commodity markets. We believe it may explain why commodity cycles can become so powerful and have enormous persistence.
Chart 1: Illustrative Cantillon Effect
Some History
The Cantillon effect was first described by 18th-century economist Richard Cantillon (who inspired political economists such as Adam Smith) and states that newly created money is non-neutral. Creating an abundance of cheap money via quantitative easing (QE) doesn’t mean that demand for everything will simultaneously rise. Instead, history shows that certain assets take favour over others, leading to rising prices in some areas and falling prices in others. Those closest to the money supply, i.e. those who receive it first, can spend it and gain price appreciation before the economy adjusts. As such, inflation is difficult to anticipate because it shows up later after effectively migrating through the system. Moreover, we believe it keeps migrating for a long time.
Stage 1
When central banks expand money supply, the newly created money typically flows through banks, governments, large corporations, financial institutions and then capital markets. Its first stop is bonds. They are bought by governments and investors, causing interest rates to drop. It then goes to stocks, private equity and even alternative investments and real estate
When central banks expand money supply, the newly created money typically flows through banks, governments, large corporations, financial institutions and then capital markets. Its first stop is bonds. They are bought by governments and investors, causing interest rates to drop. It then goes to stocks, private equity and even alternative investments and real estate
Stage 2
In this stage, easier financial conditions encourage spending and building. Demand-pull inflation is kicking in as consumer demand for manufactured goods accelerates. Ultimately, the investment spending increases commodity demand. Real estate may rise, and with real demand, new building occurs, driving input costs such as copper, lumber, steel, diesel and natural gas. The new money is now affecting inputs - the physical economy and wages have begun to respond. The money is starting to reach wage earners/consumers and rising prices are eroding purchasing power. While central banks may raise rates to soften inflation, this only deals with demand-pull inflation: raise rates, we spend less, or so the theory goes. But if the money has shifted to wages and inputs, raising rates doesn't help cost-push driven inflation. In fact, it may exacerbate it.
Stage 3
Commodity producers cannot increase supply immediately. For example, a copper mine requires long lead time for permitting, financing, equipment, development and labour. It takes years. While oil and gas can respond quicker than a mine, it still takes months, while Ag markets can respond in the following growing seasons but are highly weather-dependent.
Given supply is inelastic, even a modest increase in demand can cause very large price increases and spikes. This explains why commodity prices may overshoot demand. Continuing with the Copper example, it may appear trivial if demand goes up 2%, but if mine production can only increase 0.5%, inventories quickly start to go the wrong way. Prices then rise far more than the demand itself.
The Cantillon Effect is not increasing demand; it is changing the timing of demand relative to supply. Commodity bull markets often appear late in economic cycles. Why? Looser financial conditions are needed to create liquidity, inspire business confidence, encourage capital investments and spark physical construction at scale.
Who Benefits?
The first beneficiaries are resource companies: higher prices mean better margins, cash flow and valuations. However, this also leads to higher costs and wages filtering into the economy. Additionally, this money creation occurs when governments finance deficits and spend on commodity-intensive infrastructure, military, and energy transition. As shown in Table 1, commodities in demand include:
Table 1: Commodities in Demand
| Infrastructure | Military | Energy Transition |
|---|---|---|
| Steel | Aluminum | Copper |
| Cement | Nickel | Lithium |
| Copper | Fuel | Nickel |
| Explosives | Uranium | |
| Rare Earths |
A More Recent Example
Once COVID hit, central banks expanded the money supply quickly and dramatically as shown in Chart 2. Initially, as described in stage 1, equities, bonds and real estate rallied alongside low interest rates. However, while gold did nothing, energy prices soared, lumber exploded, and copper rallied alongside "Agflation" in grains, food and fertilizers. The money first inflated financial assets before flowing to the physical commodity market. Demand for manufactured goods soared starting in late 2020 and inflation hit. The central banks responded by raising rates but that just put a dampener on inflation. Wages kept rising.
Chart 2: The Covid Injection
Now, what we are witnessing is money migrating through the system, and cost-push inflation is taking over. When people think inflation is over because the price of a good or a commodity stops rising, money is often just “migrating” somewhere else. Now that it has arrived in higher wages and commodities, we believe it has the potential to stay here for some time. As described in the Auspice CIG:
Commodity prices have historically moved in long cycles spanning up to 10 years, driven by normal economic fluctuations, inventory and weather events, temporary supply disruptions, and ending when supply responds to higher prices or demand weakens. However, "supercycles" are secular and more rare. These cycles are driven by widespread physical supply constraints, lack of infrastructure investment over extended periods, and major structural shifts in global economic demand brought on by a catalyst or series of catalysts. These supercycles share a common dynamic: supply takes years to respond to demand, so when demand accelerates, prices rise for 10 to 30 years. The current cycle began in 2020, then paused after the Russia–Ukraine volatility in 2022, before reaccelerating in 2025. (p. 8)
Consider the last year (2025-2026), shown in Chart 3; it started with gold. After doing nothing as inflation exploded higher in 2020, gold finally started to perform in 2023. In 2025 it stopped, then Silver took over the headlines. 2026 started with Grains moving sharply higher, then it was energies for obvious reasons. Recently it was Cocoa, then Coffee to start the summer. This will likely keep happening. One market to the next, one driver to the next.
Chart 3: Commodity Rotation - Monthly Returns
Where this leaves us
The Cantillon Effect isn't a theory about how much money gets created. It's a theory about where it goes, and in what order. New money lands first with whoever is closest to it, inflates financial assets while everyone calls it a bull market, then works outward: into building, into inputs, into wages. Commodities sit at the far end of that chain, which is why they lag early and lead late. It is also why they overshoot. When money finally arrives in the physical economy, supply cannot answer it, and prices move far more than the demand behind them.
That's why "inflation is over" is so often the wrong conclusion: a price stops rising because the money has moved on, not because it has gone away. A static commodity allocation may leave investors positioned for the last leg of a commodity cycle. Gold worked until it didn't. Energy worked until it didn't. We don't think the answer is predicting what's next, and we don't believe anyone does that reliably. A rules-based trend process doesn't need to know whether the next leg is copper, crude, cocoa or coffee. It only needs to recognize a trend once it has started and step aside when it ends, and inelastic supply is what makes those moves big enough to be worth capturing.
The opportunity isn't in guessing the destination. It's in being positioned to travel.
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