by Nick Rokke, International Man:
In 2004, commodities investors were about to make a fortune…
Three tailwinds combined to ignite a bull market:
Global growth was strong
Inflation was on the rise
Total U.S. credit was expanding
The last time these three trends aligned, commodities took off 300% in five years. Just take a look at this chart:
The S&P GSCI Commodity Index tracks 24 different commodities. It’s one of the most robust measures of commodities we have.
As a whole, commodities rose over 300% from the bottom of 2003 to the peak in the summer of 2008.
Today, we’re seeing the same three conditions come together again. That will create another bull market… And those who get in early stand to profit the most.
The Commodities “Supercycle”
Commodities are raw materials or agricultural products that go into finished products. Common commodities include oil, iron, gold, cotton, wheat, and beef.
Here’s the thing about commodities… they’re highly cyclical.
You see, commodities prices are sensitive to economic conditions. They rise in strong economies… and fall in weak economies.
In a weak economy, commodities prices decline to the point where supply dries up. And that sets the stage for massive price runs.
When commodities prices go up for a long period of time, we call that a “supercycle.” That last one happened between 2004 and 2008, when commodities investors made triple-digit gains.
Supercyles often come in the late stages of economic expansion. That’s because the economy finally demands more than the commodity companies can produce.
And there is some lag time between supply and demand. (For instance, it takes time for oil wells, gold mines, and cotton fields to come online to meet new demand.)
Here’s why you should get some exposure to commodities right now…
Three Trends Align
Regular readers know we’re in the late stages of the current bull market. And the three trends I mentioned above are aligning once again.
That’s creating the perfect condition for another commodities supercycle.
Here’s what will kick it into gear…
Global economic growth
In 2004, all but one of the 35 member countries of the Organisation for Economic Cooperation and Development (OECD) showed accelerating GDP growth.
Today, all 35 countries show accelerating growth.
Here’s why that’s good news for commodities…
Growing economies need more resources to continue expanding. That demand will bid up the prices of commodities.
The last time this happened was 2004–07… That’s when the last supercycle peaked.
In 2004, inflation began to creep up from the low levels of the previous years.
Today, the consumer price index (CPI)—a common inflation gauge—shows inflation growing at 2%. That’s up from no inflation growth in 2015.
When inflation rises, so do the prices of most goods. Since commodities are the raw materials that go into products, their prices rise as well.
You’ve probably heard the expression, “It takes money to make money.” That’s true.
When the economy expands, so does credit. And all that credit infuses new money into the economy.
People use that money to buy products. The demand for products also increases demand for the commodities that go into them.
And that’s another tailwind for commodities.
In 2004, total U.S. credit grew at 10%. Today, total credit growth is at 3.5%.
While that’s a far cry from 2004, the difference is due to the huge housing boom we had back then. Nevertheless, any time credit expands, it’s good for the overall economy.
These three conditions generally line up near the end of an economic cycle. And we’re in the “melt-up” phase—or late stages—of the current bull market.
The conditions are now ripe for another supercycle in commodities.
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