The commodity cycle has bottomed, again

A year ago, the news looked very different. Climate change, DEI, ESG, green energy projects, AI, quantum computing, and immigration dominated the headlines. Now there’s only one story making the front page: commodities.

Trump has pushed the US government into partnerships with all sorts of resources companies. Many of them on the ASX and among our recommendations.

He’s also busy unlocking extraordinary amounts of oil, gas and other commodities. BHP is looking to revive its commodity projects in the US in response.

The trade war is now focused on commodities too. China imposed export controls on rare earths. The Europeans are back to sanctioning Russian oil and gas. The Japanese are trying to avoid it. The Indians are negotiating with Trump and Putin.

LNG export and import terminals and their supplying projects are popping up as fast as new gas power plants all around the world. Coal and oil demand is rising, not falling.

German industry is frozen for lack of key materials. Australia is trying to ramp up supply.

And of course there’s the gold and silver price spike. The precious metals even left cryptocurrencies in the dust.

The commodity space is dominating.

But this is only the beginning.

I’ve been waiting 200 years for this

Commodity prices move in very long cycles. You can measure them in decades.

Of course, measuring them at all is difficult to do. Because over such long timeframes, the value of money fluctuates heavily. Well, it always depreciates. But the pace varies a lot.

And so investors should use relative prices.

A popular example is the Goldman Sachs Commodity Index relative to the S&P500. It tells you whether financial assets or real assets are performing well as investments.

The gold to copper ratio tells you whether a boom is an artificial monetary policy aberration, or the real thing.

The gold to oil ratio tells you that oil is cheap relative to gold right now. That’s why gold miners are the place to be when it comes to precious metals investing. Their costs (oil) are low relative to their prices (gold).

But the point of cycles is that they reverse.

Our gold stock analyst Brian Chu mentioned in a meeting yesterday that one of his gold-stock investing mentors is taking an interest in oil now…

And, after more than 15 years of investing in the gold space, so am I.

The reason this style of investing works is simple. The dollar denominated price of gold and oil can literally go off the charts, given enough inflation. But the relative value of oil and gold is bound by reality. Both are scarce.

Their fluctuations relative to each other are what creates the profitable opportunity. It tells you where your money should be invested – in the undervalued option.

And the same thing applies to all other commodities. Relative price indicators highlight when to buy and sell. They tell you which investment asset class has a brighter future ahead of it.

And, right now, a 200 year commodity cycle is signalling precisely where you should be.

Why do commodity cycles
happen in the first place?

The key is the delay in bringing production online. It takes years to find new resources. Years more to get the right permits and approvals from government. Then you need to build the mine. And find a refiner.

And so our commodity supply today is based on investment decisions made decades ago. Right now, our oil supply is dominated by US shale, for example.

A 10-20 year lag between today’s commodity prices and future production is a real challenge for producers.

Can you imagine how much regulatory change, commodity price risk, demand fluctuation, technological advancement and other shifts play out over that timeframe?

But it’s great news for investors. We can take advantage of surprisingly long-term profit opportunities. Because it takes the resources producing world years to catch up to higher prices.

As one particular 200 year cycle makes clear, now is an especially good time to invest. Governments have crushed commodity production opportunities for all sorts of reasons. Local politics is wreaking havoc with the remaining mines. Underinvestment in both exploration and mine development imply supply would struggle to keep up with demand.

Commodity markets are poised for a commodity price boom. And the producers who have secured production will reap outsized profits for years to come.

Why resources demand is about to spike

You’ve probably heard that AI is spiking energy demand forecasts. Grid operators in developed countries had expected steady declines. But that would’ve been exceptionally unusual.

Electrification continues apace too. But the electricity grid is stuck in the analogue age. Underinvestment is even worse than in the commodity sector. At some point, grids are going to need a spectacular overhaul. Find out which companies are set to benefit here.

The energy transition requires more resources than can possibly be mined and refined. A concept I called the ‘Metallic Dissonance of Net Zero’ many years ago.

But there’s one more reason why we need a commodity boom. It trumps all others. Governments need the money.

They’ve tried to transition from an energy system dominated by resources that pay royalties to one that costs subsidies. And are going bust as a result.

Taxpayers will soon be given the choice between cutting emissions and sustaining welfare spending. They will choose coal mining all day long.

In Australia, this is playing out at the state level of government. In Europe and the US at the national level.

But the point is that governments are about to transition from obstructing resources development to backing it. Just when prices spike.

It’s going to be an extraordinary boom.