Evidence for a Commodities Supercycle

Since 1950, the world’s population has gone from 2.5 billion people to 6.7 billion; by 2050, this number is expected to exceed 9 billion. Source: United Nations

The evidence is mounting that the commodity markets will get back to “normal” after the sovereign debt crisis is resolved and growth from China, India, Africa and other developing nations is confirmed.

Gus Gunn, of the British Geological Survey, has identified three main factors behind the steep rise in commodities demand this decade:

  • Urbanization that is accompanied by a rise in the standard of living;
  • Population increase; and,
  • Development of new technologies whose components and gadgets are based on an ever broader base of elements.

By 2025, nearly 2.5 billion Asians will live in cities, accounting for almost 54 percent of the world’s urban population. India and China alone will account for more than 62 percent of Asian urban population growth and 40 percent of global urban population growth from 2005 to 2025.

There is no shortage of individual reasons why some argue that the price of commodities will continue to rise, but when taken together the evidence starts to be overwhelming:

  • Finite raw materials;
  • Unstable weather patterns;
  • Chronic supply constraints;
  • Increasing population base;
  • Growing global middle class;
  • Low real interest rates;
  • Shifting global trade patterns;
  • Continued monetization of European and US debt;
  • Persistent Dollar and Euro feebleness – our political masters attempting to devalue our way to prosperity;
  • The need for asset diversification; and
  • Speculation.

Will all of these reasons, working together, translate into higher commodity prices? Have today’s worries only temporarily unseated a commodities supercycle? Is the recent sell-off nothing more than a short downturn within a secular bull market for commodities?

Since the financial crisis of 2008, resource companies have:

  • Cut their debt;
  • Built up their cash reserves to considerable levels; and,
  • Are generating solid cash flow.

Based on actual earnings resource stocks are priced where they were at the bottom in 2008 and mining stocks are selling at single digit price earnings ratios. Bottom line? High quality resource stocks should be on every investor’s radar.

By Rick Mills

Richard Mills, author and host of Ahead of the Herd, is an active investor and commentator in the junior resource sector. Rick’s work covers the spectrum of company analysis and macroeconomics.

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