The Collapse of Fiat Currencies?

Commodity investments are not very frequent, current assets, and some may be undervalued today. Most people don’t have any, even if they have stocks, funds, or other higher-risk assets. Some small investors have gold, or, in rare cases, crude oil or silver. But there are dozens of major commodities on the commodity exchanges. (And some other hundreds of less known ones.)

But probably, people should buy more gold and other raw materials. Some economists are predicting the collapse of the dollar and other fiat currencies. Because of the exponential acceleration of money printing, or the “endless quantitative easing” we experience this year. (Like this Swiss gold professional on ZeroHedge.)

Why Commodity Investments Are Different This Time

“But I already heard that! Inflation and the end of fiat money didn’t come after the crisis in 2008-2009 either”–are saying others. That’s true, and the last gold price bull died quickly in 2011. (See this gold chart.) But today, compared with 2008-2011, there are some big differences that matter also in the commodity markets:

1. Quantitative easing, money printing is much bigger than ten years before. Not only in the USA, but in many other important countries, too.
2. Not only the central banks but also the governments are pouring the money among the people, scattering it like from a helicopter. (“Fiscal stimulus”.) Even conservative parties, see Donald Trump’s $1,200 checks.
3. Bond yields are at very low levels, government bills and bonds have almost no sense for investors. People lose money with traditional, low-risk investments. Real interest rates are negative, and this may stay so for many years. Central banks would trigger a debt crisis with rate hikes. So it is unlikely that they would do it.
4. The dollar is moving in a falling trend since March 2020. The falling dollar is mostly bullish for raw materials.
5. Some materials, like crude oil, platinum, uranium, are relatively cheap. Especially, if we calculate long-term, inflation-adjusted prices.

Commodity Investments After the Pandemics

If the pandemics end and the global economy recovers, also the demand side of the commodity market can improve. Three strong long trends may remain intact:

1. Economic growth in China is very high. Chinese demand for raw materials increased even in 2020, despite the coronavirus crisis.
2. The global population keeps growing. More people means more demand for products, transportation, services, and increased request for raw materials.
3. Some new industries, like electric cars, need a lot of new resources. That can push some specific materials further up.

Where Are Commodities in the Super-Cycle?

But there is another essential question commodity investors may ask. Where are we in the long-term commodity super-cycle? By calculations of the Bank of Canada in 2016, the cycle reached a peak in 2011. But downswing periods were very long in the past, lasting 14-28 (!) years. Based on this, the ongoing downtrend may last many more, possibly 5-10 years from today.

In the chart, you see the Bank of Canada Commodity Price Index (BCPI, in USD). The index (like other commodity indices) is energy-heavy. Crude oil, natural gas, and coal together have over 40 percent of weight. The index value was 412 points end of November. Almost double of the earlier lows and approximately half of the historical highs. These are not the numbers that characterize the bottom of a pit.

We are at the beginning of a secular bull market in commodities for three reasons. Central bank liquidity will keep short-term interest rates low. Government stimulus increases deficits and the money supply. A falling dollar is typically bullish for raw material prices. (…) All currency values are falling against commodities. (Seeking Alpha, Andrew Hecht)

Commodity Investments May Bounce

But the picture is even more complicated. Different commodities are topping and bottoming at diverse moments. Besides, there may be 20-40 percent bounces and corrections within a downward trend. It is worth looking at long-term charts, which few commodity investors do today.

Goldman Sachs is forecasting a bull market for commodities in 2021 based on its outlook for a weaker dollar, inflation, and the prospect of further economic and fiscal stimulus. Analysts predicted a 12-month return of 30% on the S&P’s Goldman Sachs Commodities Index. They are recommending long positions on silver, copper, gold, U.S. gas, Brent crude, and jet regrade. (CNBC) A new commodity super-cycle could be just around the corner. (Energyfuse)

Disclaimer

I’m not a certified financial advisor nor a certified financial analyst, accountant nor lawyer. The contents on my site and in my posts are for informational and entertainment purposes and reflecting my collection of data, ideas, opinions. Please, make your proper research or consult your advisors before making any investment or financial or legal decisions.

I’m long in gold miner stocks, uranium miners, silver, platinum, large energy companies, and cryptocurrencies. Short in the S&P 500, Brent crude, and the German DAX at the time of writing.

(Photos:  Pixabay.com.)