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The past few years have been a wild ride for commodity markets.
We've seen everything from a surge in oil prices due to the Russian invasion of Ukraine, gold hitting all-time highs due to central bank buying, and even egg prices hitting new highs.
But while this period has been unprecedented, it’s about to get even crazier…
…as nations around de-globalize, shore up their supply chains, and secure natural resources like oil, lithium, and other rare materials.
And most importantly, I expect this dynamic to spur another commodity supercycle.
A Brief History of Commodity Supercycles
Supercycles are long-running commodity bull markets.
More specifically, a commodity supercycle describes a period where commodity prices rise above their long-term trend for 10 to 35 years.
These cycles – from peak to trough – can last between 20 to 70 years:
The last one we saw went from the late 1990s to 2008. During this period, we saw commodities like copper, lumber, and iron surge in value:
This commodity cycle was driven by China’s emergence as a global economic powerhouse. But all commodity supercycles are triggered by a structural boost to demand.
For instance, the first supercycle coincided with the emergence of the US as an economic powerhouse in the 1880s.
The next came during the British re-armament and continued through the end of the reconstruction period of World War II. And the third came during the oil price shocks of the 1970s which boosted the prices of other commodities by increasing production costs.
Every supercycle is triggered by big shifts that move the demand for commodities on a global level while the supply remains constant.
Economics 101: Prices rise when the demand for any good rises while supply remains constant.
This could be something like a global pandemic, a War in Europe that disrupts the flow of oil and gas, or a population boom.
The Latest Commodity Supercycle Has Arrived
Commodities are only said to be entering in a “supercycle” if it meets three criteria:
The trend includes all major commodities
The price change should be at least a tripling of pre-cycle levels
It has a duration of five or more years
We won’t know about the last point until we’re well into a cycle. But the other two criteria have nearly been met as all major commodities (i.e. copper, oil, wheat, iron, lumber, lithium) saw a major surge between 2020 and 2021 with all doubling or tripling:
And I’m not alone in this thinking; here is a recent analyst note from Goldman Sachs:
While the COVID-19 re-openings and the War in Ukraine are driving demand for commodities, there are other secular trends driving this new supercycle.
The Song Remains the Same
Last month I laid out five investing “mega trends” that would define the next decade.
And #4 on that list was agricultural sustainability. The world is going to need to feed an additional one billion people in the next five years. And by 2050, we need to increase food production by 50%.
This population growth will be a key driver of the coming commodity supercycle.
But it’s not the only factor; deglobalization – or #3 on the “mega trends” list – will also drive commodity demand.
When there are fewer goods flowing through the global economy, the supply of goods is artificially low. With demand rising as populations boom, this will put upward pressure on commodities.
In addition, governments are putting a lot of emphasis on job creation and environmental sustainability. This includes the Inflation Reduction Act which will spend nearly $750 billion on energy and climate initiatives.
And overseas, we’ll see similar spending packages like the European Green New Deal and China’s One Belt, One Road.
All these spending packages pump billions of dollars into commodity-intensive infrastructure projects.
Investing for a New Supercycle
There are multiple ways to invest for a new supercycle.
You could invest in mining companies who are physically extracting raw materials from the Earth or companies who transport these commodities from point A to point B.
You could also invest in the companies that finance these mining operations (which is what I’m doing). Or you could even invest in broad based commodity ETFs.
But whatever you do, I’d always hold some commodity positions in your portfolio.
Because if my analysis is correct and we are entering a new commodity supercycle, you won’t want to miss the boat.
Stay safe out there,
Robert