INSIDE THIS EDITION:
Is There a Commodities Supercycle Around the Corner?
Despite some weakness in equity markets this week and a spike in the 10-year treasury that spooked investors, we have been closely watching upward price movements across commodity markets for weeks.
Oil prices, for example, have risen approximately 30% this year on a pickup in demand and the expectation that demand will continue to increase through the end of the year. At the same time, some metals, including copper, are seeing steep price increases due to expected supply shortages ahead. This week we saw copper prices rise above $9,000 per ton for the first time in nearly a decade, which puts it within striking distance of its all-time high set in 2011.
Most noteworthy is that these price increases in commodities may also indicate investors are starting to get portfolios positioned for rising inflation risks. Looking at fund flows, we see that money has been steadily flowing into commodities since the second half of 2020. This has led to the largest net-long position in commodities that we have seen since before 2011.
In fact, net-long positioning in commodities. combined with forecasts that call for rising inflation and a depreciation of the US dollar, have some large institutions saying that we could be witnessing the beginning of a new commodity supercycle. This would be the fifth new commodity supercycle, a drawn-out period of rising commodity prices that exceed long-term trends that we have seen over the last 100 years. The chart that follows shows the magnitude and duration of the last four commodity supercycles, and we note that they tend to extend for quite a long time.
And while we are not necessarily prepared to call for a commodity supercycle just yet, we acknowledge that a post-pandemic economic recovery mixed with loose monetary policy raises the chance of a robust commodity cycle.
We consider chances to increase, especially factoring in the move toward renewable energy and electrification across economic sectors will require considerable investment in infrastructure, further boosting demand for many commodities.
To provide a sense of how substantial the demand increase might be, we can look to a study conducted by Deloitte titled “Commodities of the future: Predicting tomorrow’s disruptors.” In it, they predicted that global demand for lithium would double or triple by 2030, that electric vehicles will require four times the copper required by combustion powered engines, and demand for battery-grade nickel will increase 50% by 2030.
As you might imagine, these might be strong secular trends that also have large implications for the commodity cycle. More specifically, they might drive higher fuel prices, higher food prices, and higher input prices for goods and services, including construction. A strong commodity cycle might additionally have non-financial impacts on global trade, currencies, and geopolitics. With such a complex commodity environment potentially awaiting us as investors, we continue to believe that extra attention should be given to both global macroeconomic developments and broad commodity markets. These sectors might ultimately offer opportunities to either hedge against inflation or take advantage of a strong commodity cycle.
Weekly Global Asset Class Performance Table
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Avidian Wealth Management, LLC), or any non-investment related content, referred to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Avidian Wealth Management, LLC. Please remember to contact Avidian Wealth Management, LLC, in writing, if there are any changes in your personal/financial situation or investment objectives to review/evaluating/revising our previous recommendations and/or services. Avidian Wealth Management, LLC is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the Avidian Wealth Management, LLC’s current written disclosure statement discussing our advisory services and fees continues to remain available upon request.
Financial Planning and Investment Advice offered through Avidian Wealth Management (STA), a registered investment advisor. STA does not provide tax or legal advice and the information presented here is not specific to any individual’s circumstances. To the extent that this material concerns tax matters or legal issues, it is not intended or written to be used, and cannot be used, by a taxpayer to avoid penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.