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.
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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.
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