Commodities – that is, raw materials ranging from oil and copper to cotton and grain – are not typically a large part of a private investor’s portfolio.
Commodity prices are highly cyclical. When prices rise, commodity producers boost supply to take advantage. As supply rises to meet demand, prices fall again in turn, and so on.
Over the very long term, commodities prices tend either to be flat or falling in real terms, because technological improvements lead to more efficient ways of using and extracting raw materials.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
However, there are periods during which demand rises strongly because of a major change in the global economy. Supply then struggles to keep up as producers adjust to this structural shift.
This leads to a prolonged period of rising prices and investment in supply by commodity producers, until supply has finally grown enough to meet or surpass demand.
This is known as a commodities “supercycle”.
The most recent example came in the early 2000s, when China opened up to world trade, and became a significant force in the global economy.
China’s rapid economic growth saw surging demand for all commodities, as the country pumped money into building roads and railways, and expanding its cities.
That boom lasted – with a brief pause during the global financial crisis in 2008 – right up until 2011, with oil peaking at well over $100 a barrel and copper at more than $4 per pound.
By that time, China’s growth was starting to level off.
However, more importantly, commodity producers such as mining companies had invested so much money on finding more raw materials, that the new supply overwhelmed demand, and prices dropped again.
Today, there are signs that we might be seeing another commodities supercycle, as governments around the world spend heavily to help their economies recover following the pandemic.
The price of copper in particular has shot up, as it is used widely in “green” technologies.
The best way for private investors to get exposure to a commodities boom is through the resource producers themselves – by investing in miners, for example.
However, it’s worth bearing in mind that all such booms come to an end eventually.
To learn more about investing in commodities, subscribe to MoneyWeek magazine.
-
Are you one of 15 million people at risk of retirement poverty?Two-fifths of people in the UK aren’t on track for a minimum lifestyle in retirement, new data shows. Are there steps you can take to boost your pension?
-
150 banking hubs now open across UK – is there one near you?As the 150th banking hub opens its doors, a Post Office deal that offers basic banking services has also been extended until 2030. We explain what this means for you
-
What is a dividend yield?Videos Learn what a dividend yield is and what it can tell investors about a company's plans to return profits to its investors.
-
Fiscal drag could cost millions of earners thousands – what is it, and how can I protect my money?Videos The government froze tax thresholds, which will drag employees into higher tax bands as wages rise with inflation. We explain what fiscal drag is, and how to avoid it.
-
What is a deficit?Videos When we talk about government spending and the public finances, we often hear the word ‘deficit’ being used. But what is a deficit, and why does it matter?
-
Too embarrassed to ask: what is moral hazard?Videos The term “moral hazard” comes from the insurance industry in the 18th century. But what does it mean today?
-
Too embarrassed to ask: what is contagion?Videos Most of us probably know what “contagion” is in a biological sense. But it also crops up in financial markets. Here's what it means.
-
Too embarrassed to ask: what is a marginal tax rate?Videos Your marginal tax rate is simply the tax rate you pay on each extra pound of income you earn. Here's how that works.
-
Too embarrassed to ask: what is stagflation?Videos Traditionally, economists and central bankers worry about inflation or recession. But there is one thing worse than both: stagflation. Here's what it is
-
Too embarrassed to ask: what is the metaverse?Videos The term “metaverse” sounds like something out of a science fiction novel (and it is). But what does it actually mean?
