Investment outlook for 2022 - Part 4 (Commodities)

Over the last few weeks, I’ve started to bring you the four key investment themes I’m watching for 2022. I discussed Food before the Glasgow summit recently, if you missed it you can read the note here. The third theme and my focus in this note is on Commodities.

I generally think of commodities in two baskets — industrial commodities and currency commodities. Industrial commodities are used in the production of goods and services (copper, iron, zinc, nickel, oil etc).

Currency commodities are stores of wealth, the most obvious is gold. We don’t really use gold to make products (although it does exist in small amounts in some components), instead it’s a store of value and a hedge against currency.

Industrial commodities have edged higher over the past year mainly due to supply issues and the disruption of the pandemic. I suspect this will settle down in a couple of years, I explain this more in a recent podcast episode which touched on this topic.

The podcast was on real estate, but we spent a fair bit of time talking about the supply shock and how I think it will even itself out in the coming year or two.

The thing about industrial commodities is, when the price goes up, the incentive to mine also goes up and more supply eventually starts to hit the market.

Mining companies are swimming in extra profit and cashflow. They tend to prefer reinvesting for growth, seeking to increase their production capacity.

We’re seeing this played out, check out the chart below:

Katusa Research @KatusaResearch

Mining Cash Flows Go BRRRR… Precious metals producers are printing money at a fever pace. The chart below shows the cumulative free cash flow generation for North American precious metals companies.

So my outlook for industrial commodities is pretty simple - they’ll stay high next year but eventually will come back down as new supply hits the market. I don’t think we’ll see hyper inflation in industrial commodities. If we were, I would have expected the gold price to be much higher.

And that’s the thing for me. Despite all the talk about higher inflation etc, the gold price has barely moved over the past year and still sits at around US$1800 per ounce. US long term interest rates have barely moved either. So these are two very strong signals telling us that inflation is short term, pandemic related and will adjust itself out in the next year or so.

So in summary (this is a shorter than usual note), I’m keeping an eye on all commodities but not yet seeing any price action that suggests a breakout like we saw 10-15 years ago.

There is an exception though….carbon credits.

I’ve spoken about carbon credits many times here and have been adding KRBN to my portfolio throughout the year. We’re now up 83% over the past year and I think there are still solid gains ahead. Demand for carbon credits, given recent COP26 pledges, is set to explode.

If you missed my previous comments on carbon credits and why I think the market is going through a game-changing moment, I encourage you to check out my note below:

Carbon credits the best performing commodity so far in 2021

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