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All commodities are entering a new supercycle - Will Rhind

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After several years pressure in downward action. The price index for the commodities space is finally looking up. CEO of granite shares is back. Will Ryan welcome. Thank you, David. Well, we're going to be talking about this commodity Supercycle that we're just about to enter. You were telling me offline about this story.

Very interesting story. Very important story, because it's not often discussed in the media, but it affects every aspect of our economy. Tell us about what a Supercycle is. Well, Supercycle it's typically coined when you see. Um, a sustained period of awkward crisis, um, among the commodities. And there's typically four periods that last, you know, year longer.

Um, but sometimes for as long as like a decade. Uh, and so we refer to that as a Supercycle. When we see that, you know, prolonged, awkward price pressure over number of years. And why do you think we're entering one? Just now I'm looking at the Bloomberg commodities index, which we'll get into a little more detail in just a bit, but over the last 10 years, it's seen a lot of volatility.

A lot of pressure it's been trending down over the last couple of years. And finally, we're starting to see an uptick. Why now? Well, I think David, you got to go back to, you know, when was the last time that we had a commodity Supercycle? Then the last cycle cycle that we have was in the early two thousands.

And the reason for that was you had, you know, major emerging economies, China obviously being the largest and the most important one, but Brazil, Russia, India, as well, that were industrializing and urbanizing on a unprecedented scale. And so we're consuming a huge amount of raw materials and commodities.

Which led to a sustained period of out-performance or awkward price movement in the commodity complex. Now that all came to an end, um, around the time of the financial crisis. Um, but since then the market is, can be consolidated or consolidating. And we've had a situation where cap ex in the commodity sector was low or ready before COVID.

And what COVID has done is just exacerbated that problem even more so, so frankly, you know, producers within the sector, we're really just running their businesses, you know, last year, um, and happy, you know, in pure survival mode, as opposed to, you know, spending money on new capital projects. And so now that the vaccine news has come out, I've seen a huge rally in the commodity prices.

Obviously it's commodity like oil going from an extreme of minus $40 at the low, um, to now $66 per barrel. As we trade today. And this is really all on the back of, you know, higher anticipated demand. Um, now that the global economy is in a recovery mode, but also higher inflation expectations that we're seeing now for the first time in many years.

Okay. Yeah. We'll come back to both demand and inflation. I just want to touch on the commodity. So first of all, thank you for clarifying the commodities we're referring to are. All commodities, industrials, precious, agricultural, and energy. And you're right. The prices of these commodities have risen a lot since the pandemic.

Well, the start of the pandemic last year exactly a year ago, but I wonder how much of this price increases simply due to a supply crunch, logistical issues with agriculture, with, uh, with everything else. I think quite a lot of them, David, and that's the kind of initial momentum that we've seen. And I think that, I think it's still got some room to go here.

I mean, who would have thought in the depths of last year that we'll be talking about an oil price back over $50, let alone above $60, um, as we trade today. So I think absolutely. You know, in terms of the immediate reaction. Um, to the vaccination and the more positive, uh, news now around COVID is that absolutely.

Um, we're seeing, you know, the result of that they are manifesting itself in higher commodity prices, but it is a good reason to believe that it's more than just a demand recovery and it's more than just bottlenecks and supply that are now coming back. And I think that, um, the next sort of few years, as we transition.

Uh, to a sort of green, industrial revolution, if you will, you know, we're seeing huge amounts of demand for particularly metals, um, but any type of raw material that will be used to rebuild our global economy, um, away from carbon. Okay. How long do these super cycles usually last well. I had lost a number of years, David, sometimes, sometimes, right?

Decade. I mean, typically people refer to the last one or the two thousands of lasting, almost a decade. Um, and then obviously we had previous, you know, super cycles before, and indeed people are making analogies around this potential start. Could we like what we saw in the seventies, there was a period of high inflation.

And was really the last inflation driven commodity boom that we saw. Uh, obviously people thought that that would manifest itself and the other two thousands. And we'd go, we did get the commodity price increases. We never got that inflation boom that we saw in the seventies. So this time around, um, there's much more, I think, uh, talk about higher inflation.

I think the commodity boom we saw in the early two thousands, a large part of that was due to the China story, the growth of China and their in their, uh, appetite for raw commodities. A lot of their growth, especially on the construction and manufacturing fund has slowed in recent years, as they shift to a more consumer economy.

Do you see that weighing down on commodities in the near term future, as they continued to grow into a more technologically advanced consumerist economy? I think that it's going to be a different type of boom David. So, you know, this time around, uh, you're going to see an uptick in demand for raw materials, commodities, and I think it'd be less so about urbanization and industrialization and much more about technology as you said, but the technology this time around is going to be building a green economy.

And so we need, you know, key metals talked about lithium. We talked about platinum in the past. We've talked about copper, all sorts of other ingredients that are needed to move to a common free future. And so there will be used sources of demand we're seeing right now. Just it'll be different from before.

Okay. Let's go through the, uh, the different sectors of the commodities. Now you've talked about the precious, sorry. The, uh, the base metals required for the electrification story. Let's talk about energy first. Let's move on to oil. So as you know, oil has pretty much collapsed last year, Swift rebound, or back at about $60 a barrel.

Some people are calling for a hundred dollars a barrel by the end of the year. Some people say that's too optimistic. What's your outlook. I think in the short term, David oil prices can go higher because, you know, we had a big bottleneck in supply. We still got OPEC and Saudi Arabia being, you know, the largest producer still, um, publicly, at least committed to supply carts at the market.

But you know, the more important thing here is a, is a demand recovery, uh, and that could have the short-term propel prices higher than what we're seeing even today. Okay. And the reopening of the economy, that's, that's part of your thesis as to why there's going to be a higher demand or is there something else as well?

Yeah, absolutely. It's part of the thesis in terms of high demand, but I think also, you know, what's happening here is that you're seeing coordinated stimulus programs, both monetary and fiscal from the major central banks around the world. And I think. Um, you know, policies that much more this time around as opposed to that what happened after the financial crisis.

Um, but this time around is going to be much more socially orientated, you know, governments targeting full employment and therefore the, the money supply moving much faster than we saw your art, the financial crisis. So when we're talking about redistribution of wealth type policies and more money going into the hands of more people in the economy, Then obviously people are going to consume more and consuming more, will be beneficial for the commodity markets.

Do you think this story would hold? Even if we didn't have a pandemic, let's say the crisis we had last year, it never happened and there's no, there's no reopening trade, so to speak. And we just sort of had a steady growth in the economy. Would there be still more demand in oil as you had, as you had mentioned?

Well, I think if you're talking about a situation where the pandemic never happened and the trend. For a lot of these commodity prices would probably still be marginally lower. Um, because you know, the, uh, commodity markets and altar, they're all slightly different, but if you're talking about oil specifically, um, you know, it was difficult for, we will always apply oil in the world and therefore that has adjusting itself.

Um, and you know, I think the, the pandemic was something that accelerated that supply story. But, you know, again, absent of some kind of major demand push what the industry though the industry can do is really adjust on the supply side or just the supply side. And so that will continue to be adjusted until they came to the point where, you know, the economy was strong enough to stimulate demand.

Again. Do you think the green energy trade could, at some point in the future, out-compete the energy trade? Well, in many ways that could be one of the same thing or, you know, two sides of the same coin. Um, but certainly we're talking about the race for new energy, uh, and degreed economy and kind of more broadly.

So we've heard, you know, Elan maskers publicly, you know, mentioned metals, such as nickel and saying that their producers have to produce more of it. Um, but I think in terms of hydrogen, that's a big, exciting. So an area where like a lot of cap ex that's really started to have what happened now at the government level, uh, as well as, you know, the corporate level.

And so, you know, people are really pushing Cod to transform, uh, the global energy infrastructure as we have it today into a, a carbon-free world. Right. I'm just curious specifically in regards to oil, because as we do transition to a more green economy, wouldn't there be less demand for crude oil. Yeah, absolutely.

So clearly in a, in a carbon-free world or an energy environment that is rapidly decreasing nice. And then the highest profile a victim, if you will, has to be oil itself. Um, and so over the, over the longer term, we would expect the price of oil to decline as demand for oil declines accordingly. And that will be replaced with, uh, other sources of, uh, energy.

Okay. Yeah, that makes sense. Now let's talk about agriculture, the next one on the list. Uh, another very interesting sector soft, uh, saw commodities have seen very strong, uh, price growth as well. In fact, I've seen it at my grocery stores. Let's talk about that. Yeah. So, um, you know, food prices just more broadly, there's an inflationary effect.

Um, that's happened the pandemic, uh, and they're not going to affect the supply chains and obviously producers themselves, um, very brave destabilize a year last year. Um, so there are, again, the pandemics of circumstances resulting in high prices. But, you know, the, the, the biggest story, I think for agricultural commodities is always weather dependent.

And again, we live in an environment where the weather is more unstable, um, due to the climate, we have more on predictability. Uh, around the cross and therefore that leads to, you know, spikes in prices, but whatever commodity or whatever crop is affected most. So it's much more weather dependent, uh, at the high level.

Okay. And how much of this price growth then? That's weather dependent is sustainable. And will you, do you think that this could cause some significant impact on inflationary pressure with the entire economy? Yes. In terms of food prices. Um, because obviously that's one of the things that in terms of the inflation basket, that people obviously feel most because they have to consume on a daily basis.

And so typically when you're talking about the commodity prices moved, that affect people, most it's energy and food. Um, and so, you know, higher food prices at the grocery store, um, does affect consumer behavior. And obviously if people have to pay more than that's a root cause of ablation itself, Right.

And finally, precious metals. Everything has been riding rising except precious metals. It seems, I'm talking about specifically gold and silver platinums actually had a nice run in rhodium as well, but these precious metals, the big ones, gold and silver, they haven't done very well. Despite loose monetary policy.

Despite stimulus that we've seen is peaked in August and we've never seen $2,000 again. Why is that? Well, the major story, David has been a rise in real yields and accompanying that rise and real yields has been an increase in the value of the dollar. And really, you know, most people couldn't have probably gotten more bearish on the dollar bill when gold went to an all time high in the middle of last year.

And I think so much so that it was probably one of the most overcrowded traits out there. And so what we've seen in the back half of last year, and even coming into this year is a resurgence in the dollar. It's probably some short covering, you know, going on, but resurgence of the dollar and of course, real yields inflation expectations pick up.

So that's definitely her gold over the short term, but longer term, you know, as I've said on, on this show, you know, many times before. Um, I think that we can only go so far in terms of the actual, real yields themselves before the fed or the central banks intervene, um, and exercise yield curve control.

Yeah. Okay. I'd like to talk about the relationship between monetary policy and commodities. I know this is something that was discussed a lot in our show and I've gotten a lot of different opinions, but the consensus seems to be that commodities prefer lower rates. First of all, do you agree with this view?

I think the most, um, businesses, most sectors have a low rates because all things being equal. If the cost of financing is low, then you have a more conducive or fluid. This is environment. So there be a lot of producers borrow money, there's leverage involved. And so it's easier to do that and less expensive when rates are low.

Um, so generally speaking, yes, I subscribed to that theory. Well, I like to examine the relationship between monetary policy and commodity. So people talk about how monetary policy were loose. Monetary policy. Typically is good for commodities, but if you examine the entire history of the fed funds rate, let's just go back to the 1950s.

For example, you'll see that there were periods of time when the federal reserve lowered rates, but that drop in rates. Isn't always followed by a rise in commodity prices. We're seeing that now in 2020 and 2021, and people are saying there is a relationship, but is it fair to say that there is a relationship?

Is that a historically accurate comparison to make it's not quite as correlated as, or as black and white is that. Um, in that it's not necessarily a cause and effect. Um, it's more functional. I think if you have Lusa monetary policy, just more broadly, um, you have more money floating around the economy and therefore, you know, from a business perspective, your borrowing costs are lower.

Perhaps you borrow more, um, and pay obviously a lower rate for doing that. But you know, the other aspect to the stimulus. Type policies is what's happening with that money. And if we're talking about redistribution policies, I E money going into the economy and going into people's pockets through direct, you know, stimulus payments as we saw last year.

And we'll continue to see here in the United States or just more broadly speaking redistribution policies. Um, then, you know, those can be stimulated for commodity prices because if the net result is people consuming more, whether they're buying more white goods or whether they're buying more food products, you know, those are all pushing demand for the underlying commodities themselves.

Okay. Finally, let's talk about investment instruments that. Are exposed to the book commodities index. The Bloomberg commodity index is a popular index is one such instrument. The, a commodity, the ETF that you have that tracks is commodity index is the C O M B ETF comb. Tell us about that and how that works.

Yeah. So in the commodity world, you know, the Bloomberg commodity index, it's a broad index, kind of think of it like an SMP type as it'd be 500 for the commodity world. So broad index covers 23 individual commodities. Those are the most economically significant and liquid commodities in the world. And so that index breaks out in four major sectors.

So you have energy, you have precious metals, industrial metals and agriculture. And you have a diversified exposure to each one of those unblind commodities with a cap on each center at 33%. So in other words, no single center can represent more than a third of the index at any given time. So it maintains its diversification across the board.

Right. And I, I know the CEO MB ETF that you have is a passively managed ETF that tracks his index. I'm wondering if you ever considered creating an actively managed ETF that tracks, well, a similar basket of commodities, but except you have the freedom of over-weighting were underweighting certain commodity sectors that you deemed could outperform or underperform in the near term.

Have you considered that? Yeah, it's something that we consider all the time in terms of different ideas. I think that. You know what you get with an index. And some of the reasons I think the strengths of a product like that is that typically people are just looking to get exposure to the market. And they're looking at for one or two reasons, number one, because they want diversification.

In other words, they want another return stream. That's different to traditional stocks and bonds, or as of the case, perhaps more and more now they want to hedge against inflation. And so that using broad commodities, such as clmb as a way to do that. Okay. Fantastic. Well, thank you very much for coming on the show.

I appreciate that it was a pleasure, always a pleasure to have you, and thank you for watching kicker news on David Lynn.

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