Commodity Comeback

Producing most commodities is a highly capital-intensive endeavor. That means a lot of money to build and ramp up production, not to mention the delays in funding, permitting, and building any new projects. Typical delays can be on the order of 10 years or more.

With supply unable to meet growing demand, prices rise. It’s Economics 101. So producers of those commodities enjoy higher revenues, and higher profits as their costs remain fixed or rise more slowly than the underlying commodity. And as profits expand, so do their share prices. You have a solid trend for years as supply struggles to catch up to demand. It’s a secular bull market.

What’s sowing the seeds for a new commodities supercycle? The drivers are numerous, which reinforces the probabilities. First, we have a shift. In the above table, 12 of the 14 commodities ranked showed gains last year. In 2019, it was just 9. In 2018, just the top 3 commodities eked out a gain. Then we have all the usual suspects: near-zero interest rates and bond-buying from central banks, massive government spending and deficits, ongoing printing to increase the money supply exponentially, stimulus cheques being given to the majority of the population, huge infrastructure, green energy, and Covid-19 fighting and relief spending. Oh, and possibly a long-term bear market in the U.S. dollar, in which commodities are priced.Plus all the pent-up demand from people unable to go out and spend due to pandemic restrictions. I believe the large gains in base metals and energy over the past year are the markets sensing that a flood of consumption and inflation are coming our way.

And Goldman Sachs is not alone. Bank of America has also forecast a surge in commodity prices as a result of post-pandemic global economic recovery. JPMorgan said in a recent note that metal, energy, and agricultural prices are reaching multi-year highs, signaling a commodity supercycle that may last for several years. 

I agree. That’s why it’s time to position for a new commodities supercyle.

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