The Investment Opportunities of Inflation
Unless for some reason you haven’t needed to buy anything this year, you know that prices for everything are going up. The dollar just doesn’t go as far as it used to.
For sure, the pandemic greatly affected supply chains and created big disruptions and that led to higher prices. But it’s about more than supply chain disruptions now. Several major bullish trends are in place driving up commodity prices. Commodities are the building blocks of the products and necessities in our lives. Higher commodity prices mean a higher cost of living.
Bullish Trends for Commodities
Despite pockets of coronavirus outbreaks in some countries, overall the world economy is opening back up. In other words, demand is coming back. As a way to stimulate growth, governments around the world have plans to spend big money on infrastructure projects, which use up tremendous amounts of commodities. The trend to go green, to electrify, is another long-term tailwind for commodities.
China, the biggest consumer of commodities in the world, contained COVID quickly and led the way in economic recovery. This, too, helped push up commodity prices. There’s seemingly no end to China’s appetite for commodities. Quite the contrary, China has ambitious plans not only within its own borders, but in Asia and parts of the Middle East and Europe. Its One Belt One Road initiative will seek to help developing countries modernize and build infrastructure. The cost of the initiative is estimated to be between $4 trillion and $8 trillion, the largest infrastructure and investment project in history.
The Changing World
Between 1960 and 2000, the economies of developed countries, despite having only about 15% of the world’s population, as a whole were larger than the economies of developing countries. But you didn’t have to be a genius to know that freer trade would reverse that trend. China and to a lesser extent India and other developing countries were destined to take the lead.
I made this basic point in 1999 in my book Defying the Market, noting that massive markets in countries like China and India would mean rising demand for commodities, and that our technology wasn’t addressing this most pressing issue. It was no secret that developing countries would be growing rapidly, and any basic economics course teaches that when developing and poor economies grow, they grow on the back of commodities.
As I’ve stated before, and explore in detail in my latest book China’s Rise and the New Age of Gold, everything points to more of the same during the next 20 years. Developing economies, which now as a group have surpassed developed economies in size, will continue to drive commodity demand, which will accelerate.
The Renewables Kicker
That rising demand from developing economies will get a kicker from a global push to transition to renewable energies, an effort that will require a gargantuan leap in commodity use. One reason is that electrification is the key to renewable energies. When you think electrification, you have to think copper…lots of it. Growth in developing economies also means growing demand for oil for use in petrochemicals.
When it comes to oil, everyone seems to think that electric vehicles (EVs) will replace traditional gas-powered cars on the road and we will need a lot less oil in the future. But if there really will be more than a billion EVs on the road, we will need incredible amounts of many kinds of metals.
EVs to Strain Supply
I already mentioned copper. EVs use a lot of copper, so this metal, too, will be in high demand. Besides copper, EVs will need lithium, graphite, nickel, iron ore, and other raw materials. Lots and lots of them.
The trillion dollar question is, will we have sufficient resources to produce enough EVs to meet demand and how much will these vehicles cost? After all, if the world runs short of the supplies of materials needed to build EVs, the cost of materials will rise, and so will the cost of the EVs themselves. The more expensive an EV, the more difficult it will be for EVs to become widely adopted.
But for investors, whether the answer to the questions I pose is yes or no, the surer bet looks to be on greater demand for commodities. That’s particularly true for the “red metal,” i.e. copper.
This year, as the world economy resumes growth and EV demand explodes, so will demand for copper. For our favorite investment play on this crucial commodity, click here now.