Commodity investing the antidote to the Age of Scarcity

Broken supply chains, geopolitical tensions, war, inflation, rising energy costs, food crisis, droughts, famine, depleting mines. Welcome to the 2020s!  

The age of abundance is dead. The patterns defining this decade suggest more volatility is on the way, especially in the things that matter most — food, energy and shelter. 

It’s why investors should be focusing on commodities. 

A perfect storm of tight supply that spans minerals, oil, gas, food and water is approaching. The modern world has been spoiled with years of cheap and plentiful supply. But that’s set to change. 

Decades of underinvestment in the Old Economy means we are embarking on a new era of shortages. 

Mines are being depleted without replacement reserves in sight. Oil, gas and groundwater deposits are turning into giant underground voids. Global crop production is declining alongside severe droughts and war in the Northern Hemisphere. 

All this while the planet adds around 1 billion people every decade. And all this while humanity embarks on its most ambitious project yet: Ending its 100-year reliance on fossil fuels. 

Demand for commodities is not going to stay still in the years ahead. It will surge. 

And the timing couldn’t be worse. We’re on a collision course for global shortages just as the world demands more. 

The lifeblood that sustains civilizations is now running on empty — meaning there’s no safety net built into the system to absorb global shocks. 

You might remember the consequences of such shocks from last year. Everything from barley to nickel recorded triple digit price gains after war broke out in Ukraine. 

The same thing happened a few months earlier as the West opened up from its COVID-19 hibernation. 

An assumption that supply was limitless meant we’ve underinvested in the commodity sector. The consequences are now boiling to the surface. 

So, how did we get to this point? Years of falling commodity prices and stable supply drove global capital out of commodity investments and into the New Economy: Tech.  

To give you one example, let’s take the U.S. tech giant NVIDIA (NASDAQ: NVDA). The company currently trades at a price to earnings (PE) ratio of 225. 

Now compare that to the world’s largest diversified mining company, BHP (NYSE: BHP; LSE: BHP; ASX: BHP). Right now, it trades at a PE of less than 10! 

There’s a deep chasm of value separating those industries that produce luxury ‘nice to have’ items. Social media platforms, entertainment, streaming services, video gaming and smart phones versus those that are critical for human survival. 

FOOD, SHELTER, WATER and ENERGY. 

But you can’t build tech devices without mining. In fact, you can’t build, eat or drink anything without investment in the commodity sector. 

Which is why a gross misalignment in capital distribution from the old economy into the new is steering us on a dangerous path. One that promises a critical decline in living standards as we sink into the EVERYTHING shortage.  

As an investor bracing for this fallout the solution is simple. Accumulate commodity stocks. 

Other than water, food represents the most basic but critical resource for human survival. 

And just like its commodity cousins, the ‘softs’ as some would describe them, have witnessed massive volatility in the early parts of this decade. Wheat futures recorded their lowest price in 60 years on April 13, 2019. That followed years of declining prices. 

It set the stage for complacency. But COVID-19 and war in Ukraine laid bare the consequences of underinvestment in a crucial sector. 

It’s why, last April, wheat futures exploded 150% from their lows — the spike on the far right below. 

But wheat wasn’t the only commodity igniting. The 146 year-old London Metal Exchange (LME) broke down as traders put a squeeze on the nickel market. 

On March 7, 2022, Reuters reported nickel had soared 30.7% in a single trading session, the biggest daily percentage gain on record. The LME suspended trading and abandoned contracts. 

Without the capacity to deal with extreme volatility, the world’s oldest and most important commodity exchange now faces a torrent of litigation from traders as they line up for their turn in the London courts to seek compensation. 

But last year’s dramatic surge offers a glimpse into the future. Volatility is here to stay. Tight supply in the global market has not been addressed. Meanwhile, demand continues to rise. 

It guarantees many more price shocks in the years ahead. 

We’re seeing the consequences of underinvestment play out in the real world, too.  

The supermarket, fuel station, building costs, power bills, hardware store — you name it, we’re all feeling the pinch. 

The Age of Scarcity is upon us. 

— This column was previously published in Livewiremarkets.com. 

James Cooper is a geologist and mining analyst. Based in Melbourne, he’s now the resident commodities analyst at Fat Tail Investment Research and editor for the Diggers & Drillers Publication. You can follow him on X (Twitter) @JCooperGeo.