Commodity Cycle: Has it Peaked?

Detailed summary

We’ve covered the commodity cycle in depth over the years… But has it already culminated? That’s what we examine today as markets enter a turbulent patch. The post Commodity…

It’s been a rough few months for resource investors, culminating last month in one of the worst months on record for small-cap resource stocks.

In the month to 30 October, the ASX materials sector fell around 8%, copper-related stocks dropped more than 15%, and lithium stocks shed close to 30% of their value. Gold slumped to roughly US$3,876 an ounce, its lowest level in about a year.

So, it begs the question: is the upward leg of the commodity cycle over given the violent turn we’ve just seen?

First up, let’s revisit what a commodity cycle means so we can better understand where we sit.

High prices attract heavy spending. That spending eventually swamps the market with new supply, causing prices to fall. And when prices tumble, capital flees and investment dries up.

Given that mines gradually decline over time, a lack of investment eventually leads to shortages. The cycle turns, and it all starts again.

Sounds simple in hindsight; however, it’s much more difficult to track the commodity cycle in real time. That’s why we’re constantly on the lookout for signals that let us assess the cycle’s progress.

Broadly speaking, the last great low came exactly ten years ago, back in 2016.

That’s when investment in new mines and exploration hit rock bottom; BHP and Rio Tinto hit cyclical lows in their share prices, and copper cratered to multi-decade lows.

Opening of the article, excerpted from Fat Tail Daily. To read the rest, open the article on the publisher's site.