As I wrote last week, the past decade has been all about the FAANG stocks.
Most investors have been laser-focused on betting on the emergence of various technology platforms.
And for good reason.
After all, that’s where the money has been.
In stark contrast, you’ve probably heard little about investing in commodities over the same period.
Yet there are good reasons to think that commodities will be the place to be in the next five years.
Even as investors are obsessing over Bitcoin and the latest electric vehicle stocks…
A boom in commodities is quietly gaining steam.
Here’s why I think the boom is just beginning.
The World’s Most Hated Asset Class
Just over a year ago, oil – the king among commodities – became the most hated asset in history.
That’s when the price of West Texas Intermediate crude went negative.
Oil prices have rebounded sharply since then.
The price of Brent crude oil has now fully recovered to pre-pandemic levels of $66 a barrel.
And oil isn’t the only commodity that rebounded sharply.
This past week has seen iron ore, palladium and timber all hit record highs.
Copper, the world’s most important industrial metal, traded above $10,000 per metric ton for the first time since 2011.
Essential agricultural commodities – which I have written about here before – including grains, oilseeds, sugar and dairy, have also soared. Corn prices went above $7 a bushel for the first time since 2013. Soybean prices also hit an eight-year high.
The S&P GSCI (Goldman Sachs Commodity Index), which tracks price movements for 24 raw materials, is up 24% this year.
The Commodity Supercycle: Back From the Dead
The commodity supercycle is a recurring theme in the history of investing.
A supercycle is a more than decade-long, above-trend rise in the price of a wide range of base material prices due to a structural increase in demand.
The U.S. experienced a commodity supercycle in the late 19th century. Demand for oil, steel and copper exploded as the emerging global superpower industrialized.
The reconstruction of Europe and Japan unleashed another commodity supercycle after the Second World War.
As the 21st century dawned, demand for commodities exploded from the BRIC countries – Brazil, Russia, India and China – launching yet another commodity supercycle.
The price of copper rose from less than $2,000 per metric ton in 2000 to a record high of $10,190 in February 2011.
That was the year commodity prices last peaked.
Demand from the BRICs ebbed.
The S&P GSCI fell 60%, erasing three decades’ worth of gains.
The commodities boom of the 2000s turned into a bust.
An Explosion in Demand
The last commodity supercycle was all about demand from China.
China remains part of the reviving commodities boom today as well.
Over the past year, China has been building up its stock of all commodities, from agriculture, iron ore and petrochemicals to natural gas and oil.
But this time, you can add the housing boom in the U.S. and the global post-COVID-19 recovery to the demand equation.
Then stir in all the raw materials needed for electric vehicle batteries and electric motors, from lithium to rare earth metals.
And you may have the makings of a boom like no other in recent memory.
Today, supply shortages are so severe that almost all commodities markets are in a deficit.
Take the example of oil.
Before the pandemic, the world was positively awash in “black gold.”
U.S. oil production peaked at 13 million barrels per day.
With regulatory headwinds from the incoming Biden administration, analysts don’t expect oil production to rebound to pre-pandemic levels.
Less investment in future oil production means tighter oil supplies.
Goldman Sachs now expects to see oil prices hit $80 a barrel in the second half of 2021. It warns of a large supply deficit this summer as vaccine rollouts accelerate.
Sure, soaring prices will encourage more supply. But it can take years to get an oil well or a copper mine up and running.
And with raw materials in a bear market, capital expenditures in energy companies and miners fell an unprecedented 40% in the first half of 2020.
Christyan Malek, a J.P. Morgan analyst, suggests that there will be a $600 billion shortfall in capital expenditures between now and 2030.
The New Boom
Commodities have already rebounded from their historic lows.
Here’s why I expect that rebound to continue.
First, structural demand for commodities is soaring.
President Joe Biden has already pushed a $1.9 trillion fiscal stimulus bill through Congress. He’s also proposed a $2.3 trillion infrastructure spending bill.
These efforts – part of some $15 trillion in fiscal packages worldwide – will stimulate the appetite for copper, steel and oil.
Second, inflation risks are rising. The one-two punch of massive government spending and central bank easing will boost commodity consumption and weaken the U.S. dollar.
Inflation expectations priced into the U.S. bond market have already climbed to their highest level in eight years.
Real assets like commodities tend to thrive in inflationary environments.
The bottom line?
Yes, tech stocks and electric vehicle stocks may be grabbing the headlines.
But the return of the commodity supercycle may turn out to be the next decades’ most profitable bet.