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Oil, other commodities will be in the dumps for another decade
Remember the commodities supercycle, that seemingly endless 2000s commodities boom? It drove oil, gold, copper and other commodities to record levels.
The supercycle was driven by exploding demand from China and other emerging countries, supply bottlenecks caused by years of not developing wells and mines, and rock-bottom interest rates that inflated demand for hard assets all around the world.
But now gold, oil and other commodities are well off their peaks, so far off, in fact, and for so long that they can only be described as in a supercycle in reverse, or a secular bear market.
If that’s true — and I’m pretty sure it is — investors who piled in to commodities are in for a bruising decade ahead unless they take profits or cut their losses.
Meanwhile, stocks, which run counter to commodities, may well go much higher, along with the U.S. dollar.
“We believe that we are in the initial years of a secular down cycle in commodities,” wrote Shawn Driscoll, manager of the natural resource-focused T. Rowe Price New Era Fund PRNEX, -1.27% in the fund’s most recent semiannual report.
“Commodity cycles are very long on the way up and the way down,” he told me in a phone interview. They last around 13 to 15 years, because it takes that long for fundamentals of supply and demand to go to extremes.
When the most recent supercycle began in 1998, Driscoll said, commodities prices had plummeted, so producers shuttered old mines and wells and hadn’t opened new ones in a while.
But when demand revived, it took years for producers to catch up. Ultimately, companies built too much capacity just in time for the next peak.
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