Two commodities that could lie at the heart of the next resources bubble

Every couple of years, some unlikely commodity becomes the star of the natural resources markets.

In my short time aboard planet Earth, I’ve seen it happen to uranium, potash, graphite, rare earth metals, lithium, cobalt, vanadium, silver, rhodium and, of course, marijuana.

It’s the Canadian markets that seem to get most infected by these mini-bubbles, but you could almost take a generic template for the story and then just change the name of the commodity.

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So which commodities now look ripe for the bubble treatment?

The mini-bubble template for niche commodities

The mini-bubble story goes like this.

There’s a structural shortage of commodity ‘X’. Not enough of said commodity is being produced and because there has been little investment for decades, there has been very little exploration for said commodity. This is “about to change”.

Said commodity is vital in the production of something important – often a new or green-related technology, or some “strategic” (that’s a word you’ll often hear in this context) asset. Where’s the new supply going to come from?

The cycle begins with the discovery that there is barely a company out there that specialises in said commodity. Word gets out that there is an impending shortage. The narrative spreads. The one or two companies that do specialise in this market start to rise in value, often quite dramatically. Copycat companies start to emerge.

By the end of the cycle, even some worthless scrubland in some forgotten backwater that some company had on its books has been rebranded as an exploration play on commodity ‘X’, investors buy it – and you have a bubble on your hands.

I don’t subscribe to the “bubbles are bad” argument; it’s more nuanced than that. Being on the wrong side of a bubble is horrible – I’ve been there – but bubbles serve a very useful purpose: they accelerate investment. Without the dotcom bubble much of the internet architecture we enjoy today would not have been built. The railway bubbles of the 19th century laid the tracks on which, 150 years later, trains still pass on. Four hundred years on from the Tulip Bubble, Holland remains at the heart of the global flower trade.

Bubbles in commodities usually deal with the supply shortage issue, even if they end badly. As long as you, as an investor, can see it for what it is, you should be OK.

I’ve turned down investment opportunities, due to my belief that something was a bubble. Technically, I’ve been correct – but I lost the opportunity to make a lot of money, because the bubble still had a long way to go. So another trick is to recognise roughly where we are in the bubble cycle.

But if you can identify one of these “niche” commodities fairly early on and invest, that’s as good a way of making money as I’ve ever seen. For example, I’ve mentioned helium before – several times in fact over the past couple of years – in particular a company called Desert Mountain Energy (DME.V) in which I own stock. Desert Mountain has done incredibly well, and we are now at the stage in the helium bubble where other helium-focused companies are beginning to start up.

There’s still plenty of room for the bubble to expand further, but nor are we at the very beginning. The big speculative opportunities are in other helium plays, many of which are currently at the pre-IPO, pre-RTO and seed money stages.

I’m now wondering what the next one is going to be and, at this point, I bring together three random conversations with different people I’ve had over the past week.

The best candidates for the next commodity mini-bubbles

First was with a car dealer friend, Ashley Winstone, who runs Palmdale Motors, a buying agent for cars. You phone up Ashley and say “I’m looking for a pink Volkswagen Golf”, or whatever it is you’re looking for. He then searches databases across the country and finds you the pick of the pink Golfs, all at knockdown prices (hopefully), you choose the one you want and he delivers it to your door.

You’ve probably noticed that I’m in the market for a new car. Now you might think that given the economy is on the brink of the biggest recession in 100 years, that demand for vehicles might be down. But one of the many ways in which Covid-19 has created unexpected mini- booms – bikes, for example, and home studio equipment – is in vehicles, so Ashley says at least. Outside of central London you do notice it. Traffic is heavy. People are driving more in this new era of working from and being at home more. Public transport is the big loser.

Next we jump to conversation two, with a serial natural resources entrepreneur friend. What’s he up to? Looking for opportunities in hydrogen.He thinks it’s the next niche commodity. We are moving from fossil-fuel based to hydrogen-based (fuel cell) energy systems, he reckons, particularly as regards transportation (never mind that more than 95% of hydrogen is currently produced from fossil fuels). He’s not sure if he’s going into production or hydrogen tech – he’s still researching the space. But one of his comments lingered with me: “I don’t care if I need to wait ten or 15 years, if I make 100 times my money.”

And then we jump to conversation number three with a rep from the World Platinum Council, who was telling me about its latest ‘Platinum Quarterly’ report outlining supply and demand for the second quarter of this year, with an updated forecast for 2020 (I’ll try to cover platinum soon, by the way). One of the headlines from the report jumped out at me: “Hydrogen economy elevates platinum as a precious metal with long-term store of value.”

Platinum is one of the most effective and durable catalysts in fuel-cell technology. In the event that fuel-cell transportation goes mainstream, platinum demand will increase and its performance will reflect that of its currently in-demand sibling, palladium.

But more people driving will either push up the cost of oil or increase pollution – or both. The end result is the acceleration of demand for alternatives. (Covid accelerates everything). Fuel cell tech is one alternative.

So perhaps hydrogen and platinum are two of the next niche commodities.

Watch this space.

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