Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
The solution to higher prices is higher prices
This most simple of quotes is likely to be tested in the coming months after what can only be described as a bumper year for commodities. Seen as one of the few true inflation hedges, professional and amateur investors have been pouring into everything from energy to iron ore, lithium and rare earths in the pursuit of protection from weakening sharemarkets.
The sector has been a natural beneficiary of the post-COVID recovery, with construction returning and very few signs of a slowdown in the demand for various finished goods around the world. But the big question facing investors is can they keep moving higher?
Higher commodity prices automatically make the cost of doing business higher for many parts of the economy and in various pockets it appears that short-term supply and demand imbalances are being priced into perpetuity. Take for instance the oil price which has reached USD$93 per barrel on Russia-Ukraine concerns.
Whilst there is clear risk that sanctions placed on Russia would reduce supply of this key commodity, surely this risk is localised and unlikely to extend into the next few years. Similarly, with OPEC+ having made several production cuts to protect the oil price during the pandemic, when it fell into negative territory, there is a very real risk that production is increased as governments seek to pay down COVID-era debt more quickly.
We tend to forget that commodities are the ultimate cyclical business, and that even super cycles never last, hence the quote in the title. The longer that the price of iron ore, copper, lithium and oil stay elevated, the more likely marginal production comes on line to meet this clear supply and demand imbalance.
This is without considering some of the real world risks impacting on the demand for oil. Take Ampol’s (ASX:ALD) bumper earnings result this week, which interestingly took a closer look at the company’s future in an electric vehicle world. The company reported record sales volumes of fuel at 22.04 billion despite air fuel remaining well below pre-pandemic levels.
Petrol demand has recovered to above the 2019 level baseline, but anyone on the roads or more importantly trains at the current time can likely see a key driver of this result. The trains are deserted, with a growing cohort of commuters electing to drive in order to avoid the virus, evidenced by the escalating traffic jams, at least until this week. After close to two years, most State Governments are removing work from home mandates, likely sending a flood of people into the CBD once again. It will likely only take a few weeks of peak hour traffic before the trains start to fill up again; only time will tell what happens to the price of fuel in the coming months if the trend is similar overseas.
