The Commodity Supercycle: Is It Really Over?
Believe it or not, doubts are starting to arise over the viability of the commodity supercycle that’s driven hard assets higher in recent years. Some analysts proclaim the boom is coming to an end.
For example, Citigroup came out with a dire warning for commodity investors in April…
In their opinion, 2013 will be the first year in many where commodities as a whole end the year lower than where they started. The bank went on to say that over the next few years, commodities will trade lower on bearish individual supply/demand metrics and weakening macroeconomic factors.
Of course, there are two sides to every story…
Analysts at JP Morgan feel the boom in hard assets has another decade to run. They assert that the commodity weakness we’re seeing this year is merely a “mid-cycle pause”.
Furthermore, investment guru Jim Rogers says the supercycle upswing for commodities is far from over. He points to agriculture commodities as one of the best resource investing opportunities in the markets today.
So, who’s right?
Is the multi-year run up in commodities finally over? Or is this year’s hard asset weakness merely a buying opportunity in disguise?
To answer those questions, let’s take a step back…
First of all, what is a commodity supercycle?
According to economist Simon Kuznets, the 1971 Nobel Peace Prize winner who came up with the theory, a supercycle is a multi-decade trend of rising commodity prices. These cycles occur thanks to population growth and infrastructure expansion in developing economies.
The current commodity supercycle, which many experts agree started in the early 2000s, is attributed to the rise of China, Brazil, and India.
As these countries increased infrastructure spending to develop their economies over the past 10 years, demand for essential commodities has skyrocketed. As a result, assets like copper, silver, and oil have all exploded in price over the past decade.
And let’s not forget grain and soft commodities…
Grain prices have surged for two reasons. First of all, the simple fact that global population is booming. There are a billion more mouths to feed since the turn of the century.
Secondly, hundreds of millions of people are entering the global middle class. As you may know, middle class people eat more meat- pork, chicken, and beef. Of course, these animals have to be fed something, and most of the time it’s corn or wheat.
Take a look at what surging demand has done for commodity prices…
As you can see, there’s an undeniable trend of rising prices since 2003.
The question commodity analysts are asking now is…
“… Will it continue?”
In my opinion, the answer is absurdly simple. All you have to do is ask two basic questions.
- Will global population keep growing?
- Will people keep reaching to attain a higher living status around the world, but more importantly, in developing economies like China?
Unless an enormous plague wipes out large swaths of human population, question #1 is a given. As a matter of fact, global population is expected to exceed 8 billion by the year 2025.
As far as people attaining a higher living status, consider this…
According to a recent bi-lateral study between American and Chinese economists, China’s middle class is expected to triple between 2012 and 2022. That’s right, by 2022, China’s middle class will jump to 630 million- up from 230 million in 2012.
Folks, in nine years there will be more middle class Chinese consumers than there will be people living in the entire United States!
So do you really think the commodity supercycle is over?
The broad based pullback we’re currently seeing in many commodities won’t last forever. In fact, many analysts (including myself) believe weakness in these assets should be looked upon as a fantastic buying opportunity.
Of course, don’t expect the ride to be smooth as glass once you invest. Commodities will be very volatile over the next year or two before the next growth phase begins. And that means you’ll have to time your entry into the commodity markets with utmost precision.
Thankfully, you have Commodity Trading Research to guide you through it all. Stay tuned for timely information and analysis of everything having to do with investing in hard assets!
Until Next Time,
Justin Bennett
Category: Commodity Trading
