“The most valuable commodity I know of is information.” – Gordon Gecko in “Wall Street”
Commodities have experienced a renaissance after the bursting of the internet bubble at the end of the 20th century. The new and long-term upward trend began with most commodities in late 1990s and already lasts nearly 15 years. During this time, most commodity prices manifold strongly. The following table presents the maximum price increases of selected commodities since 1999:
Indeed, these were all pretty formidable price increases (except of natural gas) – however, also frightening at the same time. Formidable of course for investors who diagnosed correctly and timely the start of the bull market in commodities and are now sitting on luscious profits – potentially chilling the champagne now. Yet simultaneously frightening, because what if the boom has come to an end? Are those formidable profits on the verge of being vanished into thin air? Wouldn’t it be better to sell and realize profits?
Potential new investors face similar frightening questions: Getting in now? What if the all-time highs are already behind us? What if the bubble was punctured recently and is ready to burst now? What if the globalized world economies are standing on somewhat healthy feet again after the successfully passed finance, euro and Greece crises? Shouldn’t one buy when the blood flows ankle-high and sell when the corks are popping? Is the stuff with the blood already behind us or still in front of us?
Furthermore, a highly used argument against commodities is that they can bring extreme profits solely thanks to an increased volatility that is driven by short-sighted speculators, hedge funds and other kinds of grasshoppers. An increased volatility – per definition a large price range – is also valued negatively as being unpredictable like the tempers of a diva. And when comparing with other “classical investments”, the risk-reward ratio is said to be not as prettily balanced as with bonds, stocks or fixed-income securities.
However, Yale University calculated and empirically proved that in the long run, commodities yield an average profit of 11% per year, which is about the same as for stocks. However, the risk is significantly lower with commodities than with stocks. This study was completed in 2004, thus at a time when the commodity boom just started and the real strong price increases were to follow.
Against stocks, commodities have the advantage that they cannot go bankrupt, there are no quarterly conference calls, no earnings warnings, no criminal management boards, no balance-sheet doctors and no gimmicks. As for commodities, the facts lie straight on the table and it’s all just about supply and demand – and not about hot air. Thus, the question must only be: how have supply and demand developed and where are they heading to?
In the following, we will briefly sketch four drivers that make commodities an increasingly scarce resource leading to the conclusion that the commodities boom is not only a typical long-term 10-20 years market cycle, but at least a megatrend.
Demand Driver #1: Demographics
On average, every second three people are born these days. Until 2020, some 500 million people will be born and around 75% will come to earth in Asia. The UN calculated the world population to increase from currently 7 billion to 9 billion until 2050. These 2 billion new people, or 30% more than today, represent on average 1 million new humans per week coming to earth.
Additionally, another trend is active: urbanization, which is people increasingly leaving rural and undeveloped regions to move into cities. In cities, the per capita consumption of commodities is significantly higher than in the countryside. Calculations forecast that in 2050, some 6.5 billion people will live in cities – today it is only 3.5 billion. These 3 billion new people, or 86% more than today, represent on average 1.5 million people more per week living in cities.