This Commodities Rally Could Go The Distance

This Commodities Rally Could Go The Distance
Stéphane Renevier, CFA

over 1 year ago2 mins

Supply of commodities takes a long time to adjust to changing demand, so their prices tend to have longer cycles than financial assets like stocks and bonds. In fact, check out the chart above and you’ll see that commodity spot prices – that is, physical prices – usually linger within a set range for a while, then burst higher for about a decade to enter a new “supercycle”. And I have three reasons to believe we may be at the start of a new commodity supercycle.

Firstly, inflation might stay higher for longer. See, the only way we can reduce our huge amount of global debt is through higher inflation: higher prices directly translate into a higher nominal GDP, which is one of the least painful ways to reduce the real value of debt and return to more reasonable levels around the world. And unlike stocks and bonds, commodity prices would rise along with inflation.

Secondly, government initiatives could well buoy up commodity prices: both the global pandemic and the currently deteriorating economy have encouraged the world’s governments to direct resources to whatever projects they want to support, like developing cleaner energies, reducing inequality, or modernizing infrastructure. Commodities are likely to be at the center of those projects, and should be a direct beneficiary.

Finally, commodity inventories are scarce, and there’s been severe underinvestment in their production capacities over the last decade. That means it could take a long time for supply to adjust to today’s higher demand, and spiraling pandemic disruptions and rising geopolitical tensions might only delay things further.

Now, this doesn’t mean you can count on commodities rising in a straight line: their prices could still fall sharply if we enter a recession, after all. But if you’ve got a long-term horizon, the structural factors look strong, and adding commodities to your portfolio might prove its weight in gold.



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