The Inseparable Bond between Commodities and Inflation
Two rare and highly disruptive market events appear to simultaneously be in their early stages today. Price inflation is at a fresh 40 year high,¹ actively devouring the cash savings of all consumers everywhere, and at an alarming rate. There have been but four commodity supercycles, or prolonged periods of broadly rising commodity prices due to elevated global demand, in the past 115 years,² yet credentialed investors are suggesting a new commodity supercycle is underway. What is the connection between these two rare market events, what factors suggest they may both be ‘sticky’ trends, and what should you do about it?
Price inflation is measured in terms of national currencies, so when we’re told inflation is 8.5%, it means the purchase of a basket of goods and services costs 8.5% more US dollars today than it did a year ago. Consumers are willing to exchange real goods, like agriculturally productive land, or productive elements like copper and silver, for monetary currency units for many reasons, including convenience, practicality, or even habit, but one additional reason must be present for that currency to remain relevant: the consumer must believe it will retain its purchasing power while held. Artificially low interest rates mean dollar holdings provide virtually zero present income; coupled with 8.5% annual inflation, holding dollars today equates to owning a rental property that sits perpetually unoccupied while depreciating by half every 8.5 years! Only a negligent investor would delay the immediate liquidation of such a property!
Commodities are the natural resources our Creator supplied with which humanity may be sustained and constructively engaged. Commodities, as investments, have generally experienced occasional, brief booms, followed by long, drawn out busts, and are, therefore, volatile and risky assets to hold long-term. When a currency is no longer perceived as a store of value, however, exchanging an asset that will reliably lose half its value every 8.5 years, for an asset with intrinsic value that will likely hold its value (or appreciate) short-term, becomes prudent; commodity price trends today reveal the smart money is doing precisely that.
The inseparable bond between inflation and commodity prices is that both can be viewed by savers as a store of value, and when the currency isn’t, commodities will be; that’s when commodity supercycles have historically occurred.
An ongoing war between major commodity-producing nations which lacks resolution, ongoing global supply constraints, a government addicted to money-printing to pay fixed expenses, and the fact inflation is hard to ‘reign in’ once it invades the psyche of savers and consumers, all suggest inflation will remain high for years, not months.³ These same factors, coupled with a growing distrust in the dollar as a reliable store of value, suggest a supercycle for the ages may be developing in the commodities complex.
One thing we should do as investors is consider whether commodity investments are more worthy of a small portion of our investable savings than more sorely depreciating dollars.
Think about it, Shaun.
“He who earns wages does so to put them into a bag with holes. “Thus says the Lord of hosts: Consider your ways.” ~Haggai 1:6-7
1 The New York Times.com, The Morning, “Inflation’s 40 Year High”, April 22, 2022
https://www.nytimes.com/2022/04/13/briefing/inflation-forty-year-high-gas-prices.html
2 Seeking Alpha, “3 Stocks for the Impending Commodity Supercycle”, April 12, 2022
https://seekingalpha.com/article/4500969-3-stocks-for-the-impending-commodity-supercycle
3 Stansberry Digest, April 19, 2022
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.
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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