Justin’s note: Commodities are in the early innings of a massive bull market.
At least, that’s what Doug Casey thinks. But here’s the thing… He’s not just talking about gold and silver. He thinks commodities, as a group, are about to take off.
Doug has so much conviction in this call that he just launched a new commodity letter, which he talks about below in this brand-new interview.
Read on to see why the stage is set for a monster rally in commodities…
Justin: Doug, I hear you’re excited about commodities. Why is that?
Doug: Well, let me start by saying that commodities have been in a bear market for the last 5,000 years.
The real price of commodities, whether we’re talking livestock, grains, energy, or metals, has been falling since the dawn of civilization.
And that trend will continue.
Justin: How come?
Doug: Because in primitive times we only had raw sticks and stones and wild animals and plants. If you found a little piece of metallic iron from a meteorite, you were the equivalent of a caveman billionaire. If you could find the corpse of a dead deer, you could fend off starvation for another week. If you found a berry bush it was as big a deal as owning a supermarket today.
You needed commodities to live—but they were rare, and unprocessed. The whole path of civilization since the end of the last ice age 12,000 years ago has been to develop technologies to increase the amounts—and lower the costs—of commodities. Commodities are the raw materials of civilization.
But now, things like nanotechnology, space exploration, and artificial intelligence (AI) are coming onstream. They’re going to make raw materials super abundant, and super cheap.
These new technologies will cause commodity prices to collapse. They’re basically headed towards zero.
Justin: So, why launch a new commodity letter?
Doug: Why indeed. It’s a seeming paradox. We’re doing it, however, because commodities are highly cyclical. And highly volatile.
It’s true that commodity prices have been falling for the last 5,000 years, and that trend will continue. But that’s not relevant to what will happen over the next five years. Why not? Because most are not only selling at about the cost of production, but also at a clear cyclical low. Commodities are very cheap. In both absolute and relative terms. Plus, the possibility of various financial accidents and force majeure loom over the markets. Political upsets and wars typically make commodities soar. Weather conditions or disease can create shortages. These are among the macro reasons I think commodities will head higher over the next five years.
They last peaked back in 2011. Many of them are still down 50%. Could they go lower? Anything is possible, of course—we could have a credit collapse deflation, for instance. But that’s unlikely with today’s massively inflationary monetary policy, which puts upward pressure on all prices.
Justin: Commodities are certainly cheap. I can’t argue with that…but what’s to stop them from getting cheaper?
Doug: Costs of production are the limiting factor to the downside. Right now, most commodity producers are just breaking even, or losing money.
That’s a problem, and can’t continue for too long. After all, commodities are the building blocks of civilization. You need them to survive. And the world uses more of them every year. Partly because the world’s population is still growing. But in part because thousands of new uses are found for all of them every year.
There are 92 naturally occurring elements on the periodic table. Everything in the universe is made out of them. A century ago only half of them had uses; now they all have many uses.
Interestingly, the American Chemical Society recently published a paper that said a dozen or so are in already critical shortages. It said another 30 elements or so could go into short supply by the end of the century.
Silly article, from a historical perspective; I suspect they had an English major who’s a member of the Green Party write it. I disagree strongly. That’s because “abundance” and “shortage” in an advanced economy are functions of economics much more than chemistry. But perception often creates reality in markets. Einstein was right when he said that, after hydrogen, the most common thing in the universe is stupidity.
But perhaps they’re right. If so, it’s another argument to look at commodities now.
Justin: So basically, commodity prices are too low to support production. Therefore, they must rise. Otherwise, the lights go off and nothing gets built. Is that right?
Not only that, all these governments are printing up currency units by the bushel basket.
But almost none of that new money has ended up in commodities so far. They’re basically the only asset that’s still cheap.
Nobody cares about commodities now. They’re not “hot.” Bitcoin, tech stocks, and things of that nature are the current flavor of the day.
You can see what I mean in the charts below.
But if you want to make money, you’ve got to buy straw hats in winter. You need to buy umbrellas when it’s sunny, not when it’s raining.
All financial markets rotate. They’re all cyclical. But commodities are by far the most cyclical of all markets.
That’s the basic argument for buying commodities now. In five years, I expect to be saying it’s time to sell them. And, when commodity prices are at manic highs, more money can be made—and much more quickly—by going short in a bear market than by being long in a bull market.
Justin: When was the last time you saw an opportunity like this?
Doug: The last time an opportunity was this ripe was probably in 1971, before the gold standard fell.
After that, every commodity took off. Grains, livestock, energy, and the metals.
It was a monetary phenomenon then. And the same thing is happening again, albeit with a few twists. Gold, for instance, is about three times as expensive, in real terms, than it was in 1971. Say the equivalent of $120 back then. But the world’s financial situation is much, much, more unstable.
I suspect one reason is because many people who normally buy gold are buying alternative assets.
Hundreds of billions of dollars have gone into cryptocurrencies alone. A lot of people who would normally buy gold are buying cryptos instead.
Justin: Are you still bullish on cryptos?
Doug: Yes, I’ve been bullish on them for about a year and own bitcoin, other cryptos, and shares in bitcoin mining companies.
That said—even though the trend is your friend, and they’re going higher—I can no longer be wildly bullish. I mean, bitcoin’s trading north of $17,000. And I like to buy things when they’re demonstrably cheap. That’s not true of bitcoin anymore.
Bitcoin’s been in a bubble for some time now. And that bubble’s probably going to get much bigger. You’ve got to make the trend your friend—and the trend is still up. As far as crypto fundamentals are concerned, I’ll stand by what I said in these past Conversations with Casey (here and here).
I like to buy things when they’re demonstrably cheap. That’s not true of bitcoin anymore. But it’s true of commodities now.
Just look at this chart. It tells you everything you need to know.
Justin: So, how are you betting on commodities? Have you “backed up the truck” on junior miners?
Doug: Well, I generally do like to sell put options against very cheap commodities.
I do this because when you sell an option, it’s a wasting asset. So, you win if everything just stays the same.
In other words, you don’t have to be very right when you sell options. You just need to not be very wrong.
So, I’m selling out-of-the-money puts on things like wheat, soybeans, cattle, and copper.
Is it risky? Sure. That’s because anything can happen. But in today’s world it’s one of the best risk/reward propositions out there.
If, for instance, there’s a major drought in a country that produces a lot of wheat, the price of wheat can jump up 50% in a day. Incidentally, almost nobody gets it right when they’re asked what country is the world’s largest wheat exporter. They think it’s the US, or Canada. But it’s Russia. Things change.
If there’s a civil war in the Congo, copper prices could move up radically. On the other hand, if the stock market crashes, so might cattle prices—because people would be less able to afford beef. There are 100 commodities that are traded, and 1,000 things that influence their prices, in both directions.
That’s why I’m interested in the area. It’s a key sector of human knowledge. And today, when most kids think milk comes out of a carton, not out of a cow, it’s an unlevel playing field. I like it when the field is tilted in my direction…
Justin: Doug, what about the financial hurricane that hit in 2007? You’ve been saying that it will make landfall again for a while.
That would obviously be bad for stocks. But what about commodities?
Doug: Well, let’s think about this.
Historically, there have been lots of times when commodities have done well when stocks haven’t.
They’re basically contra-cyclical. Right now an excellent long-term move is to short (bet against) stocks and get long (buy) commodities.
One reason for that is that high commodity prices raise production costs for companies. And when food prices rise, people have less money to spend on discretionary items. Companies earn less because of that.
Justin: So, why is almost no one else talking about this opportunity in commodities?
Doug: These days, people are used to dealing in digits on the Net, in the Ether, up in the Cloud. It’s like an artificial reality. The world ceases to exist if they lose their iPhone. They only appreciate the digital world, and companies like Facebook and Amazon.
Commodities people, however, live in the physical world. They’re playing in the sun with cows, dirt, oil, and big yellow machines. This is where reality exists, much more than on a plastic device.
It’s gotten to the point where you almost need to be long commodities, if only as a contrarian play. And that’s coming from someone who says commodity prices have been falling in real terms for the last 5,000 years.
Justin: Doug, we’ve spoken a lot about commodity prices and mean reversion. But what about the demand side? What’s the appetite for commodities looking like?
Doug: That question requires a sophisticated answer. Three-quarters of the people on this planet are poor. And they want all the things that Americans and Europeans have.
They want to eat a lot more beef and bread. They want refrigerators, air conditioners, cars, and everything else that we take for granted. That requires a lot of raw material.
Commodity prices will go way up if we have a major war. And the clock on the wall is telling me that a major conflict is in the cards. I’m not talking about another sport war like the ones the US has been having in recent years, either. And that’s bullish for commodities.
On the other hand, technology keeps getting better. Things always tend to become more efficient. I used to get ten miles to the gallon in my car back in the old days. Now, cars get 15, 20, even 30 miles to the gallon.
Not only that, it takes far less material to make a product; manufacturing is much more efficient. Everything today is smaller and lighter. Since the 1960s, the production of everything from grains to livestock has become efficient. A typical acre yields far more grain and beef today than it did in the 1960s.
Everything’s doubled or more in terms of productivity per acre.
And productivity is going to go up even more with the genetic revolution now happening. So, these things are bearish for commodities over the long run. We don’t care. You can play the trends both ways.
Justin: And what force is more powerful? Is it the rising middle class in places like China and India or more efficient technology?
Doug: It’s a tug of war. That creates volatility. And that, in turn, creates opportunity. Right now, it’s a huge opportunity on the upside.
Justin: Exciting times, indeed. Anyway, that’s all I have for you today. Thank you for sharing your insights again.
Doug: You’re welcome.
Justin’s note: Last night, Doug shared everything you need to know about the upcoming supercycle in commodities in a free training masterclass.
If you missed it—and want to hear why this could be the biggest speculation of his career—we’re making a replay available until midnight tonight. Watch it here—and unlock an exclusive offer—before it’s gone.
Are you investing in commodities right now? If so, let us know how it’s going right here.