The percentage of any wild animal’s time spent searching for food is impressive, a display of planning, exertion, and perseverance which puts even Master Gardeners to shame. The animal is simply not in confusion about the importance of food. Vital resources steadily supplied to producing nations through established distribution channels by way of relatively free trade has been a boon to earthly societies for millennia, but the Covid19 lockdown dismantled the global supply chain, which today is being reconfigured meaningfully. How is the scramble for natural resources suddenly reshaping national policies and international allegiances? How do the technological megatrends discussed last week exacerbate the need for critical resources, and how should it affect your thinking and behavior as an investor?
If the Lord should tarry, effects from the Covid19 lockdown will still be playing out in 100 years. Nations are now forced to align based on the supply of required resources over and above former priorities; for instance, Europe may abandon support of U.S. sanctions against Russia this winter if Putin threatens to withdraw his supply of natural gas via the Nordstream pipeline, a development which would have massive political, economic, and currency implications. Non-producing, importing nations are being squeezed financially by higher prices and the sudden need to increase dollar reserves in preparation for the oncoming global recession. Developing, resource-rich nations, also under pressure to build dollar reserves, are tempted to fund the effort by nationalizing large producers of essential commodities, further reducing global supply, a catastrophic error most recently repeated by Venezuela. Dominant trading nations, like the U.S. and China, are adjusting production and trade policies, spending aggressively, and threatening war over resources perceived to be up for grabs, all in a frantic effort to secure critical supplies for the future. This is a telling landscape, but the opportunity gets even better for investors paying attention to the suddenly most important asset class on earth.
God made everything from nothing, but people are capable only of refashioning existing materials. Globally scalable, disruptive mega-trends, like 3D printing, robotics, electric vehicles, battery technology and renewable energy, are already introducing a new and insatiable demand for specific natural resources, especially the rare earth metals required to mass produce these new technologies. Supply for many essential resources may not exceed demand for decades; coupled with the inflation policies of modern central bankers, the evidence is beginning to suggest we may have recently entered an historic commodity supercycle.
The following factors may help as you consider whether natural resources are something you should own:
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Commodities last crashed from 2011-2020 and are coming off some of the lowest prices in history. Jim Rogers says it’s the only inexpensive asset class in the world today.
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Commodities are risky investments, and are notorious for experiencing huge bubbles and busts. Diversifying modest exposure is critically important.
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Prefer the stocks of profitable, dividend-paying producers to futures contracts, which have high trading costs and are heavily manipulated.
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Never chase prices higher when buying natural resources. Hunt for shares like an alligator, not a cheetah. Wait for recession, when demand is weak, to do most of your buying.
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Have an exit plan at the time of purchase, or at some point in the future you will definitely, woefully regret it.
Think about it, Shaun.
“Give a portion to seven, or even to eight, for you don’t know what disaster may happen on earth” ~Ecclesiastes 11:2
The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.
All investing involves risk including the possible loss of principle. No strategy ensures success or protects against loss.
Asset allocation does not ensure a profit or protect against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.
The fast price swings in commodities will result in significant volatility in an investor’s holdings. Commodities include increased risks, such as political, economic and currency instability, and may not be suitable for all investors.
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