Profiting From the Commodity Supercycle

Are we in a commodity “supercycle?” 
 
We don’t hear that term very often anymore. But in the early- to mid-2000s, talk of a commodities supercycle was rampant, as prices for everything from oil to gold to copper hit record highs after record highs.  

The Bank of Canada defines a commodity supercycle as an “extended period during which commodity prices are well above or below their long-run trend.” 

Supercycles occur because of the long lag between commodity price signals and changes in supply. While every commodity is different, the following is a rough outline of a commodities boom-bust cycle.  

As economies grow, and demand for commodities grows along with them, eventually demand outstrips supply. 

That leads to rising prices, but commodity producers don’t initially respond to the higher prices because they’re unsure whether they will last. As a result, the gap between demand and supply continues to widen, keeping upward pressure on prices. 

Eventually, prices get so attractive that producers respond by making additional investments to boost supply, narrowing the supply and demand gap. High prices continue to encourage investment until finally, supply overtakes demand, pushing prices down.  

But even as prices fall, supply continues to rise as investments made during the boom years bear fruit. Shortages turn to gluts and commodities enter the bearish part of the cycle. 

A New Supercycle  

In the investment world, when people point to a commodity supercycle, they’re usually referring to the bullish part of the cycle. 

The last big bull run in commodities took place between 1999 and 2008, and it ended in the years following the global financial crisis.  

The 2010s were a brutal decade for commodities, and by 2020, investors had all but abandoned the asset class.  

But that dismal decade may have set commodities up for another big run. 

That was the thesis behind Goldman Sachs’ 2020 commodities supercycle call—a call they reiterated entering this year. 

The lack of investment in commodities for tomorrow is “startling,” Goldman said in December. “Without sufficient capex to create spare supply capacity, commodities will remain stuck in a state of long run shortages, with higher and more volatile prices.” 

War On Fossil Fuels  

The supercycle thesis is one shared by Will Rhind, founder & CEO of GraniteShares. His firm is the issuer of the $157 million GraniteShares Bloomberg Commodity Broad Str No K-1 (COMB), which jumped 27% in 2021, and 15% in 2022.  

“The reason commodities will do well for some time is because up until a few years ago, commodities had been in a bear market,” Rhind said in a recent Exchange Traded Fridays podcast episode. “When commodities are in a bear market, firms are not committing capital to develop production resources, not bringing on new supply into the market, and being more efficient stewards of investors’ capital by returning any profit back to investors in the form of dividends instead of investing in the business,”  

In addition to the normal supply-lagging-demand dynamics that support a typical commodity supercycle, this time around, there’s some unique aspects to this supercycle that could add fuel to the fire, Rhind noted.  

“The genesis of the supercycle today is around the energy transformation that we’re seeing at a supermacro level in the world,” he said. “The transition, broadly speaking, is from a world dependent on fossil fuels to one that is much more dependent on renewable, sustainable forms of energy.” 

Rhind said governments are “waging war on traditional fossil fuels.” That, along with the rise of the ESG movement, strongly discourages producers from ramping up commodity supplies despite high prices.  

Gold to Benefit

While commodities broadly tend to do well in a supercycle, this time around, investors might want to be more selective in the commodities they buy.  
 
“[This] supercycle is not going to uniformly benefit every commodity like we saw in the early 2000s,” Rhind noted.  

He was particularly bullish on gold, which he sees as benefiting from “de-dollarization.” 

“The U.S. dollar is slowly slipping as the world’s reserve currency. We’re seeing other countries start to trade and pay for things in their respective local currencies, and moving away from the dollar,” Rhind explained. 
 
In his view, gold can go “a lot higher” from where it is today.  
 
If that’s the case, then funds like the GraniteShares Gold Trust (BAR) and the SPDR Gold MiniShares Trust (GLDM) will benefit.  

Email Sumit Roy at [email protected] or follow him on Twitter @ sumitroy2