What is a commodities supercycle?
A commodities supercycle is a period of high demand for commodities. This typically coincides with a major economic boom or recovery. A report from the United Nations (PDF) discusses four previous commodities supercycles across commodity sectors, including oil, agriculture, and metals.
Savvy investors and economists can identify industries that are poised for extremely high demand. For example, the 2000s saw a global commodities supercycle partially driven by massive demand from China. Agriculture, energy, precious metals, and industrial metals prices boomed, returning from a period of depressed prices in the 1990s.
An example of one specific commodity that saw major price growth is copper. The price exploded from $2,000 per tonne in 2000 to over $10,000 in 2011.
High demand in the early phase of an economic growth cycle may be the best time to capture commodities supercycle benefits in your portfolio. But it's not always easy to identify a commodities supercycle until it is already underway. In the next section, we'll try to find the conditions that spark a commodities supercycle.
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When does a commodities supercycle begin?
Commodities supercycles typically follow a period of global recession or depression. This is when demand for commodities has lagged and prices have fallen. The supercycle may be sparked by a change in economic conditions, government action, new trade agreements, or other factors.
Supercycles may not apply to all commodities, so it's a good idea to look at specific demand for each commodity to get a good measure of whether or not a supercycle has begun.
It may be easier to spot the end of a supercycle, as happened when oil prices fell beginning in 2014.
Oil (WTI) vs. the S&P 500 (GSPC), 2014–2021 Source:Yahoo! Finance
But even if you miss the very start, there could still be plenty of opportunity to make money from commodities supercycles, as they often last a decade or longer.
Is a commodities supercycle happening now?
According to Goldman Sachs, we are at the start of a new commodities supercycle right now. The world is beginning to recover from the year-long shutdowns that came with the COVID-19 pandemic. And as government stimulus trickles into bank accounts, demand for many commodities is about to skyrocket.
The vaccine will lead to a robust V-shaped economic rebound, Goldman analysts say. Analysts believe it could be on par with the early 2000s. Government stimulus checks are just one part of the puzzle. If President Biden's infrastructure plans take hold, we could see demand for a wide range of commodities used for construction.
This increase in demand will also correlate to growth in labor markets, which can trigger further economic expansion. And because many commodities come from developing nations, we could be at the start of a global growth period as the entire world works together to extract, process, transport and use various commodities.
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Ways to take advantage of the commodities supercycle
If you believe we are in a commodities supercycle, there are several ways to take advantage.
1. Commodities trading
The most direct path to benefit from a commodities supercycle is trading or investing in commodities. However, these markets are often very complex and volatile. And this makes them a risky and less-desirable market for the average retail investor.
If you want to dip your toes into commodities directly — which is not recommended for most people — the best way to do so may be by buying futures contracts. This is an agreement to buy a specific amount of a commodity at a specific price on a specific date. If the market price goes above the contract price, the investment is profitable. If prices go down, it's a loser.
To get some of the same benefits with less risk,*you may want to look at options trading. An option gives you an option to buy a commodity at a specific price on a future date, similar to a futures contract. But an option is not an obligation. You can let your option expire without further consequence than perhaps losing the money you put into it. And the most you can lose with a typical options trade is your initial investment. But again, these strategies are complex and are best left to experts.
2. Mutual funds and ETFs
Mutual funds and exchange-traded funds (ETFs) offer more diverse exposure to commodities markets. Depending on your goals, you could be interested in index fund ETFs that follow specific commodity prices or indices.
- You could take a longer-term approach by investing in a group of stocks that would benefit from a commodities supercycle. For example, you could buy a fund focused on a specific industry or sector you believe will benefit.
- Buy a diverse fund like an S&P 500 index fund or Dow Jones Industrial Average fund. These are made up of many stocks that could see some benefit from a large economic recovery.
Last but not least, you could invest in specific stocks that will benefit from certain commodities. If you think gold is on the way up, you could look at a gold mining company, such as Barrick Gold (GOLD) or Newmont Mining (NEM).
Some stocks could give you exposure to just about every commodity out there. Or you could invest in a diverse investment company that works to profit from commodities prices. With this type of investment, you profit from someone else's hard work.
As long as you balance risk and reward and understand where you're investing and why, you can set yourself up for a unique investment portfolio geared toward your specific investment thesis or goals.
Real-life commodity supercycle example
A real-life commodity supercycle occurred in the oil markets from the early 2000s into the mid-2010s. As you can see from the chart below, oil prices took off from a price point below $20 per barrel and peaked above $160 per barrel. That's an 8x return.
Oil commodity price chart, 2000–2016 Source: Macrotrends
Oil company stocks and oil traders made a fortune during this period. This is just one commodity that did well during one period. If you can spot the next commodity in high demand, you also could see your money go up nearly tenfold over a decade.
The bottom line
Commodities supercycles are a big opportunity to make money in the markets. But there's plenty of risk involved as well. By picking the right diverse investment portfolio, you can find the right combination of commodities, options, futures, stocks and funds to help you reach your investment goals.
Remember, commodities can be quite risky. But if you understand those risks and keep commodities to a reasonable portion of your portfolio, there's no reason you can't capture some profits from the next supercycle.
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