Commodity Comeback

Despite low money velocity, a funny thing has happened. Commodities have been soaring along with inflation expectations.

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One of the best ways to know where a sector stands in the bigger picture is to compare it to other assets. And looking back over longer periods of time often provides great perspective. That’s why I absolutely love this next chart.

Commodities Rising

It’s the ratio between the Goldman Sachs Commodity Index and the S&P 500. 

Looking back all the way to 1972, commodities have never been cheaper relative to the broad stock market. Never. The average of this ratio is 3.9 over 50 years. Today, it sits near 0.5. But it seems poised to soar.

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For commodities just to make it back to their average levels versus stocks, they will need to rise by almost 700%. And remember, that’s the overall index, and it’s the underlying commodities. Needless to say, some commodities will outperform others. But the companies involved in producing those commodities will do even better as their profits leverage rising revenues.

The following table lays out the annual performances of a number of commodities.

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As you can see, in 2020 nickel was up 19%, corn gained 25%, while palladium and copper both gained 26%.In a recent 2021 Commodities Outlook: REVing up a structural bull market (Nov. 18, 2020), Goldman Sachs said, “Looking at the 2020s, we believe that similar structural forces to those which drove commodities in the 2000s could be at play.”

A commodities supercycle is considered to be a multi-decade trend, where a wide range of basic resources enjoy rising prices thanks to a structural shift in demand versus supply. Typically, what happens, is that supply stagnates or drops for several years as economic demand is itself weak or constant. However, at one point a new business cycle starts, and demand picks up, while supply is unable to immediately react. 

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