MoneyLife

Weekly Brief – August 21st-27th 2021 – Are commodities out of puff?

By Lavall Chichester
marathon training

This Weekly Review is for the week of August 21st-27th and should take you 3:12 minutes to read.

Marathon Training

After a strong start to the year, commodity prices finally seem to have hit a wall. But there’s good reason to think the market’s about to get a second wind…

 RECAP

  • Back in May, the prices of commodities hit their highest in a decade. Read our story
  • But by the end of the month, China was doing all it could to bring prices back down. Read our story
  • In fact, China announced in June it’d be selling off lots of industrial metals in order to slow the rally in their prices. Read our story
  • And by August, the price of iron ore fell to a four-month low. Read our story
  • CONNECTING THE DOTS

For the past nine months or so, commodity prices have been pushed up and up by the global recovery and the subsequent rise in demand for raw materials. Throw in record high inflation, and the stage was set for the prices of oil, copper, aluminum, and even grain to shoot up.

But more recently, those same macroeconomic trends have worked against commodity prices. Growing worries over the Delta variant are threatening to throw economic growth expectations off track, while the spike in inflation seems to have been temporary after all – just like the US Federal Reserve promised.

Thing is, the detrimental effects that macroeconomic factors like these have on commodity prices are often short-lived. Commodities investing is arguably all about the long term, which is much more influenced by microeconomic factors like supply and demand. And when you look at, say, oil’s supply and demand dynamics, you start to see something interesting: Asian demand has pulled back, sure, but global oil production is still well below pre-pandemic levels. So if the Delta variant doesn’t cause another hiccup in the economic recovery like some are predicting, oil demand should gradually pick back up even as supply remains low. And that would be positive for the slippery elixir’s price.1

It’s the same with metals. Take copper: there’s been close to zero investment in new projects for the last decade, leaving the market close to peak supply. And considering that it takes at least two years to extend an existing mine and up to eight years to ramp up a new one, that tightening supply is likely to drive a record shortfall of copper over the next decade.2

 TAKEAWAYS

1. Investing in commodities is a marathon, not a sprint.

Commodity cycles happen over years, not months. And just like when you invest in stocks, your best shot is to speculate on the long term. To do that, you have to focus on the fundamentals: namely, supply and demand dynamics that should ultimately send prices up over time. That means hiccups like the one we’ve seen recently might not be a reason to panic: they might be an opportunity to buy the dip.

2. There’s a long-term opportunity in gold too.

Gold’s also taken a tumble, and most analysts aren’t expecting its price to bounce back particularly quickly. Still, a mixed short-term outlook for gold prices doesn’t mean you should ignore the metal altogether. Gold’s still worth adding to your portfolio for its diversification benefits, since its price doesn’t tend to move in lockstep with bonds, stocks, or cryptocurrencies. And if you’re worried that high inflation will stick around, gold’s value tends to keep up with price rises, rather than lose value like cash.3

 ALSO ON OUR RADAR

Klarna revealed rising losses in the second quarter last week, as the Swedish buy-now-pay-later startup puts more and more cash into driving revenue growth as high as possible. Klarna was profitable in its first 14 years, but it’s been making a loss since 2019. Investors will be hoping the cost of expansion pays off and that the company quickly returns to profitability ahead of its long-awaited initial public offering.

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