Why I'm Excited About Commodities Right Now

Written by Jason Simpkins
Posted November 20, 2015

Commodities are crashing.


They have been for about four years now.

And I'm positively thrilled about it.

This is like one big Black Friday sale. I'm looking at everything — gold, silver, uranium, copper, soybeans... I saw an article today predicting $26 oil.

Yes, please.

I would love to buy some $26 oil.

See, with commodities, it's all about the cycle. It ebbs and flows almost predictably.

When oil crashed to $30 per barrel in 2008, I bought it. When it climbed back over $100 in 2012, I shorted it. I had to wait about two years, but eventually, prices collapsed once more.

Now, I'm looking to buy once again.

People always say they want to buy low and sell high, but in practice they abandon that simple principle. They go chasing the investments that are already soaring and steer clear of the “losers.”

Not me. I love the losers. I love the outcasts and hate whatever is popular.

Like the stock market. I hate the stock market right now. I never want to buy anything that's trading at an all-time high.

Commodities on the other hand, well, take a look...

Commodities Past Year

The worst performer there at the end is rhodium. The next two are nickel and iron ore, each down more than 30%. Lumber, palladium, and copper aren't far behind. It's not just industrial material, either. Foodstuffs like coffee, oats, cattle, hogs, and soybeans are among the losers, as well.

Do these sound like things the world can do without?

Of course not. They're just in a bad place right now. The dynamics of supply and demand are out of favor.

But here's the secret about commodities: They're elastic. As they get cheaper, demand increases and supplies shrink. It happens every time.

See for yourself...

100 Year Commodity Cycle

This chart shows how commodities have performed over the last 160 years.

As you can see, every sharp decline is followed by an equally dynamic rebound.

Each boom and bust cycle lasts about seven or eight years. The down-cycle we're witnessing right now began back in 2010. So if the pattern holds we'll see another boom begin around 2017.

That's not a given, of course. These cycles can be extended by overarching circumstances.

For instance, the boom cycle that began in 1933 was exacerbated by World War II. As a result, it lasted almost two decades. Similarly, the commodity price collapse that occurred from 1974 to the late 90s was exacerbated first by Fed Chairman Paul Volcker's war on inflation, and then the collapse of the Soviet Union.

These kinds of watershed events are atypical but they do happen. Still, it doesn't change the fact that the trend always reverses. It's the commodities super-cycle. And profiting from it is just a matter of patience.

So what commodities look good right now?

Eye of the Beholder

As I mentioned earlier, I really like oil.

Last month, I talked about how production would be hamstrung by lower prices. The truth is, $40 oil has many producers and governments operating at a loss.

Yes, global growth is slow. And it may take some time to eat into the oversupply. But I fully expect the market to reverse course by 2017.

Even if it takes until 2018 or later, I'm prepared to wait. That's because once the market stabilizes, oil will return to $60-$80 a barrel in short order. A 50%-100% return over three years is a win in my book.

I'm even more bullish on uranium.

Uranium is one of the few commodities that hasn't gotten trounced. It's traded roughly flat over the past year. That's because, here, the supply-demand fundamentals have already begun to turn.

Uranium demand is set to outstrip supply next year, leading to a 60,000-tonne shortfall by 2018. This is happening just as countries like Russia, China, and India are expanding their nuclear power programs.

Over the next 10 years, we're going to see uranium prices more than double, surging from less than $40 per pound today to more than $80 per pound in just a few short years.

Again, I'm happy to wait.

I like silver, too — more so than gold, in fact. As with oil and uranium, I don't expect to reap my reward overnight. In fact, I'm hoping it falls further over the next year or two.

Currently trading at less than $15 per ounce, I anticipate a rise to $30 per ounce when the next upswing hits. To that end, I would love to see silver prices fall to $10 per ounce, or even into the single-digits.

The lower it goes, the happier I'll be to buy it.

Ditto for platinum and palladium. Both of these metals are set for an annual deficit this year — 20.3 million tonnes for platinum and 13.3 million tonnes for palladium. Yet, these metals are at their lowest level in seven years.

I like their prospects over the short and long term.

That said, I'd avoid industrial metals like copper and nickel. These metals will eventually come back into fashion, but not for a while. They've got a few more years of pain ahead before they stabilize. Even then, the ceiling isn't especially high.

I'm also wary of agricultural commodities. They can be expensive to store, and they're subject to fickle harvests.

Obviously, these are my own personal thoughts on the subject right now. I've got my own investment horizon and expectations. They may be vastly different than yours.

Personally, though, I get really excited when I see prices fall. Especially when it comes to commodities. Unlike companies, they don't go out of business.

Fight on,

Jason Simpkins Signature

Jason Simpkins

follow basic@OCSimpkins on Twitter

Jason Simpkins is Assistant Managing Editor of the Outsider Club and Investment Director of The Wealth Warrior, a financial advisory focused on security companies and defense contractors. For more on Jason, check out his editor's page. 

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