In the difficult year of 2020, commodities experienced a price collapse before reaching a new record high, with the commodity index rising by more than 25.7% in the fourth quarter. Several investment banks, including Goldman Sachs, predicted that the commodity strength will continue for a long time and enter the next wave of the super cycle.
The last commodity “super cycle” also started before a crisis, with global commodity prices rising from 2002 to mid-2008. As of June 2008, the IMF Global Commodity Price Index was 168% higher than the 1990s average in real terms. 2008’s financial crisis interrupted this process, causing commodity prices to plummet, but this adjustment did not last long, and with the introduction of global economic stimulus measures, demand for raw materials grew significantly and global commodity markets ushered in a long years of rally.
This time under the epidemic, the global central banks again chose to release cash to support the struggling economy, and with a recovery in sight, will commodities will not repeat history? The answer from Goldman Sachs is “YES”, commodities will enter another wave of “Super Cycle”.
Goldman Sachs’ view of the super cycle is based on two major aspects: demand and supply.
On the demand side, Goldman Sachs believes that the global recovery from the pandemic crisis will be fueled by a green industrial revolution and a policy focus on social needs, which will strongly stimulate demand for commodities.
China recently pledged to become carbon neutral by 2060, and Biden promised to bring the U.S. back into the Paris Agreement on climate change.
Goldman Sachs believes this green industrial revolution will not only directly impact demand for metals such as copper, but will also have a multiplier effect on labor markets and commodity-producing countries. “It has the potential to create a capital expenditure cycle comparable to the last cycle driven by emerging markets.”
Meanwhile, the emerging policy consensus around the recovery is that the social crises of the past rather than the financial crisis will require a social solution. Goldman Sachs believes that social policy in the wake of the new pandemic is similar to the 1960s, when the U.S. launched its “war on poverty.
“Policymakers around the world have signaled that full employment and increased incomes for low-income households are a key part of post-pandemic policy,” Goldman Sachs said. Such redistributive policies are positive, as low-income households tend to spend more of their extra income.
The supply side, on the other hand, shows a lack of supply to meet any structural shift in demand. Capital spending on commodities was already low before the epidemic, and production has fallen further in recent months as producers prioritize maintaining existing operations. At the same time, China has been absorbing excess stocks of metals such as copper, aluminum and iron ore from other parts of the world.
Commodities are long-cycle in nature, and as the saying goes “low prices can cure low prices”; once the market enters a low price range, capital will scale back (or stop spending altogether) to avoid unprofitable production. This helps deplete market supply and creates a new equilibrium that becomes a cyclical bottom. When prices start to rise, there is an incentive for more capital spending to increase production. During this period, prices rush further up, bringing more supply to the market.
Goldman Sachs is not the only investment bank that is bullish on commodity trends in the current market conditions. China Merchants Securities suggested that commodities will see a major 9-year bull market based on the weak cycle of the US dollar.
Earlier, Steen Jakobsen, chief economist and chief investment officer at Saxo Bank, said that an “epic” commodities boom is about to unfold.
He suggested that global digitalization is stirring up a new world order that the physical world cannot meet in terms of the production of “real” things. Biden says he will launch 500,000 new charging stations, so where will the power come from?
More generally, capital is focused on new energy vehicles, artificial intelligence and other emerging technology industries, but ultimately these technologies still require a lot of resources, which can only be obtained through mining.
Jakobsen’s view is that investors should focus on physical products, mining is one of them, where there is underinvestment or misinvestment.
The GCFF Virtual Conference, held online on February 4, is titled “Precious Day” and will feature a number of precious metal mining company leaders meeting online with investors to present project pitches.
Xtra-Gold Resources Corp. (TSX: XTG, OTCQB: XTGRF) is focused on exploring for significant gold resources on the Kibi Gold Belt in Ghana, West Africa, and owns one of the last currently unexplored gold belts in Ghana, having identified a significant gold discovery area. The majority of the Company’s current holdings were acquired by the co-founders in 2003 when gold prices were only around $275 per ounce.
Golden Valley Mines Ltd. (TSXV: GZZ) is focused on project creation while continuing to evaluate opportunities to enhance the portfolio of mining exploration projects and grow existing assets through partner-funded options/joint ventures and holdings in related entities. Glenn J. Mullan, President and CEO, is a former President of the Prospectors and Developers Association of Canada (PDAC) and has over 40 years of experience in the mining and mineral exploration industry.
Newrange Gold Corp. (TSXV:NRG, OTC: NRGOF) is focused on gold exploration in Nevada, USA and Red Lake, Ontario, Canada and is fully funded for the winter 2021 exploration program. The Company’s Pamlico project in western Nevada, which it holds with little modern exploration, has been shown by new geological modeling to have the potential to contain millions of ounces of gold.
Contango ORE, Inc. (OTCQB: CTGO) is a well-funded U.S. gold developer with a clear path to producing an average of 65,000 ounces of gold equivalent per year (GEO) at an all-in sustaining cost of $750 per GEO in a joint venture with Kinross to develop the Peak Gold JV project source. In addition, the Company has significant exploration potential on 675,000 acres located in the heart of the Tintina Gold Belt.
Summa Silver Corp. (TSXV: SSVR, OTCQB: SSVRF) is an early-stage exploration junior mining company for high-grade silver and gold resources, holding options on 100% of the Hughes Project area in central Nevada and the Mogollon Project area in southwestern New Mexico.
Vizsla Resources Corp. (TSXV: VZLA, OTCQB: VIZSF) is focused on enhancing shareholder value through the acquisition, exploration and development of precious and base metal assets and holds an option to acquire a 100% interest in the newly consolidated Panuco area in Mexico. This strength is expected to continue as the trend continues.
Ximen Mining Corp. (TSXV: XIM, FRA: 1XMA, OTCQB: XXMMF) is focused on becoming the next major high-grade gold producer in southern British Columbia. The region is one of the best mining jurisdictions in the world. Ximen owns a 100% interest in three precious metals projects, two gold projects and one silver project.
Scottie Resources Corp. (TSXV: SCOT), an exploration stage company engaged in the acquisition, exploration and evaluation of gold and silver projects, owns a 100% interest in the historic producing Scottie Gold Mine and has exploration rights to over 25,000 hectares of unique prospects located in the prolific Gold Triangle region of British Columbia, Canada. Integra Resources Corp.
Integra Resources Corp. (TSXV: ITR, NYSE American: ITRG) is a development-stage mining company focused on exploring and de-risking the historical producing DeLamar gold and silver project in Idaho, U.S.A. to the development stage. growth and ramp-up capabilities, providing a strong economic study in its first preliminary economic assessment.
Renforth Resources Inc. (CSE:RFR) is a Toronto-based gold exploration company that wholly owns five surface gold-bearing project areas in Quebec and Ontario, Canada.
Register GCFF Virtual Conference 2021 – Precious Metals Day here now!