The Commodities Supercycle

by Jason Jenkins

The rise of commodities may not be a fad.

Instead, it may be a product of social behavior and theory. I present to you the premise of the "commodity supercycle."

The concept is more than vague investor intuition; its theory is based on the work of twentieth-century economists who studied the result of demographic shifts in populations. These shifts resulted in specific effects regarding the demand for basic commodities.

Economist Simon Kuznets, the 1971 Nobel Prize winner, did research on emerging markets that led him to discover that 20-year cycles arise in countries with policies to expand infrastructure – which generates a substantial increase in the demand for resources. He uses the United States in the 1950s as an example with the creation of President Eisenhower’s U.S. interstate highway system. This same cycle has been seen in the past decade in China, India, Brazil, Russia and other emerging markets.

A Growing World Population

On average, these emerging markets are increasing infrastructure spending at about 10% annually as population growth and desire for improved standards of living are fulfilled. A growing world population coupled with finite raw materials will equal higher commodity prices. The impact of the commodity supercycle on gold is a tendency for gold, precious metals and other tangible assets, such as rare coins, to rise as the demand for commodities rises. Gold is up from $250 in 2000 to over $1,700 currently. Silver was $4 in 2000. Need I say more?

Now, how do we apply this to the markets? We know that equities move in cycles. If in one decade, equities crash, the next decade stocks boom. Commodities also move in long-term bull and bear cycles. But we must take into account that the long-term cyclical movements often contain short-term cyclical movements.

Only Half the Way Through

These cycles can be traced back to the eighteenth century. The average bull run has lasted over 20 years, with average cumulative gains of 293%. The secular bull market of the mid-1960s to the early 1980s was followed by a bear market that ended when the latest upswing began in 2001. Generally, commodity supercycles last 20 to 25 years.

According to renowned global commodities analyst and investor Jim Rogers, the current supercycle began in 2000. This means that we’re only halfway through this latest bull market.

The commodities supercycle has become an essential gauge for investors as commodities, especially gold, have turned out to be a natural hedge against a weak dollar and high inflation. Therefore, commodities investment has become a major turning point for several countries, banks, investors and the everyday individual.

People have found a number of reasons to consider an investment in commodities or commodity-based equities, be it through an actively managed natural resources fund or a passive vehicle like an index fund or exchange-traded fund. If prices for fuel or other commodities rise, one way to hedge against the impact of that price increase is to invest in those commodities.

So to some, there is a method behind the madness – and it has social science behind it.

Good Investing,

Jason Jenkins

comments powered by Disqus