Commodities: Seeds of Opportunity
I read a lot of ancient eastern philosophy, which can provide practical insights into modern investing. The Chinese poet Lao Tzu (circa 600 BC) wrote: “To see things in the seed, that is genius.”
The metaphor is apt for the commodities sector, which provides the building blocks of industrial life. We’re on the cusp of a long-term, secular rise in the prices of raw materials. The time to increase your portfolio’s exposure to commodities is now, before their values boom amid inflationary conditions. Below, I’ll show you how.
The recent rapid rise in the prices of gold, crude oil, copper, iron ore, agricultural goods, and other commodities is sending a signal that investors are getting more optimistic about the global recovery this year. The combination of accelerating economic growth and supply shortages of industrial inputs is creating powerful tailwinds for commodities. But it’s also a recipe for inflation.
Stocks retreated Wednesday as inflation fears pushed the 10-year Treasury yield higher. The Dow Jones Industrial Average fell 121.43 points (-0.39%), the S&P 500 shed 50.57 points (-1.31%), and the tech-heavy NASDAQ plunged 361.04 points (-2.70%). In pre-market futures contracts Thursday, stocks were extending their losses.
Crude oil, as the most traded commodity in the world, exhibits prices with a clear influence on other commodities in the global market. As the following chart shows, the prices of U.S. benchmark West Texas Intermediate (WTI) and international benchmark Brent North Sea crude have embarked on an upward trajectory since their lows of April 2020:
The OPEC+ group indicated Wednesday that it’s unlikely to ease its current production curbs anytime soon, which should help shore up energy prices. This time around, there’s been a remarkable lack of cheating on assigned quotas.
As bond yields climb on worries that stimulus and rising oil prices will stoke inflation, there’s a lot of enthusiasm these days for gold. The yellow metal is a traditional safe haven during inflation and it should continue to pay off handsomely as an investment in the coming months. [For our favorite gold play now, click here for a special report.]
There’s another inflation hedge that many investment advisors tend to ignore: agricultural commodities. The next great geopolitical struggle could be over food.
The world is consuming more food than it produces, largely because of population growth, rising affluence in developing nations, and extreme weather in major food-exporting countries. Poverty fighting organizations such as Oxfam predict that the price of key staples, including soybeans, wheat and rice, could double over the next two decades.
According to a new report released by The Economist magazine, the pandemic has weakened food security around the world.
The Economist Intelligence Unit’s Global Food Security Index measures the affordability, availability, safety, natural resources/resilience and quality of food across 59 unique indicators in 113 countries. The latest readings for the index reveal that food security, already in dire shape before the COVID outbreak, has deteriorated because of climate change, destructive farming practices, and pandemic-induced supply disruptions.
According to a separate United Nations report, the world must increase food production to meet demand by 50% by the year 2030, and by 80% by the year 2050. You don’t need a doctorate in economics to realize that when a product is in short supply but demand for it grows, its price shoots higher.
Clamoring for copper…
Another commodity that’s in growing demand but insufficient supply is copper. The red metal is a widely used commodity so sensitive to economic conditions, it’s a leading indicator. Copper is indispensable in a multitude of manufacturing processes and products.
The Biden administration is getting closer this week to enactment of its $1.9 trillion stimulus package. The next major initiative on Biden’s agenda is infrastructure spending on a grand scale. As the U.S. embarks on a construction spree, demand should grow for copper, making it both an inflation hedge and a growth opportunity.
The price of copper already hovers at a 10-year high, thanks in large part to China’s surprisingly robust economic rebound. Copper prices have further to run this year, as China tackles ambitious infrastructure projects of its own.
Copper will not only benefit from an increase in conventional construction projects around the world, but also from the push into renewable energies. Green technologies (e.g., electric vehicles) demonstrate a voracious appetite for copper’s high thermal and electrical conductivity.
After months of painstaking research, our investment team has unearthed the best copper play now. Click here for details.