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Hello, Reader.
The first decade of the 2000s did not produce warm, fuzzy feelings for most stock investors. But that decade delivered endless delights for commodity-focused investors. A repeat performance may be underway.
But before looking ahead, let’s take a quick glance back at the past…
From early 1999 to mid-2008, the TR/CC CRB Index of commodity prices quadrupled, while the S&P 500 produced a return of roughly zero. That robust, market-trouncing commodity boom sprung from what had been a decade-long commodity bust.
Such is life in the commodity sector: Great, big busts, which lead to great, big booms…and then back to busts again. Professional investors refer to this phenomenon as a “commodity supercycle.”
They are the financial market equivalents of a New Year’s Eve party – a long, giddy evening of excess…followed by a long, miserable hangover. As investors in this sector, the trick is to capture as much of the party as possible, while avoiding as much of the hangover as possible.
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The Commodity Supercycle
Here at Smart Money, I’ve stated several times that the commodity markets are in the early innings of a powerful, new supercycle, which erupted from the Covid-panic lows of April 2020.
Measured from that low, the CRB Index has gained about 150% – or about half the 300% gain the CRB achieved during the last supercycle. At a minimum, therefore, commodity prices should double from current levels before this new party ends.
But I’m expecting this particular supercycle to produce a more spectacular result than that, thanks to surging demand for “battery metals” from the electric vehicle (EV) and renewable energy industries.
For example, industry insider Robert Friedland believes the copper market is heading for a supply-crunch “train wreck” that could cause the metal’s price to soar 10-fold from current levels.
He warns that the global copper supply will struggle to keep pace with surging demand. A supply crunch will result, he says, due to the fact that major new deposits are becoming trickier to find and pricier to unearth.
Yet, despite this looming threat to the copper market, and to other key metals markets like nickel and lithium, commodity prices have been dozing in the corner for more than a year.
This seeming narcolepsy is leading many investors to assume the commodity supercycle is over already. Besides, why bother with “old school” investments like mining companies, when artificial intelligence (AI) investments are all the rage?
The Commodity Rally Isn’t Dead
The answer is a simple one: The commodity rally isn’t dead; it is merely pausing before starting its next major move higher. Let’s not forget two important factors.
First, the Russian invasion of Ukraine created an “artificial” spike in commodity prices that has been gradually unwinding during the last few months. Second, the Federal Reserve has been raising interest rates for the last 15 months, which is a trend that usually pressures commodity prices.
As the chart below shows, almost immediately after the Fed initiated its current rate-hike cycle (area shaded in green), commodity prices started drifting lower.
That’s the bad news for commodity investors. The good news is that the Fed is close to ending its rate-hike cycle, and it may shift to lowering rates sometime next year.
If the past is prologue, that shift could be a big boon to commodity prices. For proof of this tendency, take a close look at the period on the chart from March 2020 to March 2022. That’s when the Fed slashed interest rates from 2% to zero. Commodity prices soared almost immediately.
To be sure, artificial intelligence is the topic that is sparking the greatest buzz in the stock market, and for good reason. This new-new thing is creating a bounty of wealth-building opportunities.
But that doesn’t mean old-old things like the commodity markets will simply fold up their tents and go home. Many stocks in that sector could deliver AI-like performances over the next couple of years, as the commodity supercycle enters its next major explosive phase. So, don’t count commodity investments out just yet.
Regards,
Eric Fry
Editor, Smart Money
