The Commodity Supercycle Has Begun

Today’s post is short and simple.

Investing is often best done that way.

The short of it is this: a new commodities supercycle has begun. It’s going to last several years. You want to be long natural resources and natural resource companies.

The declining purchasing power of national currencies muddies the waters, but I should say that the eventual price of commodities, metals, grains, meats, fossil fuels, softs such as coffee and cotton, is lower. This is especially the case if you measure them using a constant unit of account such as gold.

Unless you subscribe to peak oil theories and the like - that there is a finite amount of something and the resource is running out (and I have some sympathy with these arguments) - the simple fact is that we are getting better at producing these things.

As we get more productive, their price heads lower. Once we used manpower, picks and shovels to mine metals. Now we use huge great machines and robots. Grade may be declining, we may have to go to far-flung and inhospitable places to mine rock, just as demand is increasing, but human beings are also getting much better at mining.

The same goes for farming. We are getting better at it.

However, if prices fall too low, mines and farms close down. Investment dries up. This leads to shortages. Prices then go up to compensate, which leads to increased production, which leads to surfeits. Then prices fall again.

Thus commodities are highly cyclical, even if the broader direction of travel is lower.

Cycles tend to last many years. It takes a long time to get a mine producing. The last great commodity supercycle was the noughties. The one before that, in broad brush terms, was the 70s.

We are in another one now.

And the charts are confirming it.