Commodities: The Long Game
There’s no escaping it, the headlines haven’t looked good for commodities for a number of years. But maybe the key with this alternative asset is to take a step back and look at things from a different perspective – a much much longer perspective.
Current analysis of commodities has a strong focus on the reversal of early 2000s trends when massive increases in demand from China and other emerging economies, coupled with supply bottlenecks and low interest rates, inflated demand for commodities the world over.
In comparison to these ‘boom’ years, things haven’t been looking too rosy for investors recently. Many traditionally solid commodities, such as gold and oil, are well off their peaks and analysts reckon we’re in the midst of a long downward trend.
Shawn Driscoll, manager of the natural resource-focused T. Rowe Price New Era Fund, told Market Watch: “We believe that we are in the initial years of a secular down cycle in commodities.”
He added in a phone interview: “Commodity cycles are very long on the way up and the way down.”
Indeed, cycles tend to last between 13 and 15 years as supply and demand self-correct amid the multitude of global influencers. But there is another time scale at play in the commodities market that could hold significantly more influence.
Long-run trends have been mulled over by numerous economists over the decades and indeed centuries. But in 2013 David S Jacks published From Boom to Bust: A Typology of Real Commodity Prices in the Long Run with the National Bureau of Economic Research (NBER).
The paper examines commodity prices from about 1850 onwards, reviewing real price data covering 30 different commodities across industrial and precious metals, animal products and energy products.
The findings offer a fascinating new level of perspective on the asset class and appears to identify a real long-term trend within commodities that supersedes any medium run ‘supercycles’.
Mr Jacks does not attempt to debunk ‘supercycles’ or their role in the commodity market, but quite the opposite: he offers price data and statistics to confirm them. His data suggests that these cycles tend to correspond to periods of rapid industrialisation and growth. They show prices rising as demand soars and supply is restricted. Then, as the markets and technology catchup to enable supply to meet demand, there is the predicted downswing in prices.
The supercycles can be seen as starting in the 1890s, 1930s, and 1960s and peaking respectively in the 1910s, 1950s, and 1970s. The corresponding endpoints were then identified as being in the 1930s, 1960s, and 1990s.
Some have suggested that there might be another broad supercycle beginning in the late 1990s but Mr Jacks surmises that it’s too early to decide for sure if this is the case.
What is clear, at least according to Mr Jacks and his research, is that there are greater market forces at work over and above these supercycles.
Return to trend
Over and above supercycles, the research data suggests that given a long enough time scale, a certain commodity will return to its same upward or downward trend, regardless of the supercycles it goes through in between.
This would mean that if a company or perhaps a family planning for inheritance could invest over a sufficiently long period, they would almost be guaranteed to see results. Not all commodities would go up in price, however. Very clear divisions are seen in the types of commodity which continue to increase and the types that stutter unpredictably or head down in price.
Unsurprisingly, energy products are clear winners when it comes to long-term price gains. Energy is something human beings have always been in need of ‘more’ of and as our economy has grown out of a reliance on fossil fuels, so fossil fuels have broadly swung upwards.
Minerals, and precious metals are also in this clear ‘upwards’ camp, while grains and soft commodities tend to fall in price overall.
These trends have been proven with Mr Jacks’ data gathered since 1850. What they can’t do, however, is predict the future for certain. Oil demand might have been increasing since 1850, but if electric vehicles continue to increase in popularity and industry starts to heed global warming warnings and seeks alternative energy sources, demand could almost disappear for oil as a commodity.
The message to take from Mr Jacks’ data: know that nothing is certain when it comes to commodity prices but when prices nosedive for decades, remind yourself to look at the bigger picture and long-term trends.