Commodities in super-cycle: Should you buy?

Commodities have been running hot this week, as the super cycle continues. The high commodity prices have added to the concerns of rising inflation. One sector that has been particularly impacted by this surge in commodity prices is the gold market. As markets grapple with the inflation picture and its implications, investors are left wondering whether this uptrend is sustainable or merely a short-term anomaly. The broader impact on the commodities complex has been significant, with prices of essential goods like food experiencing a notable increase over the past year. Wayne McCurrie, Portfolio Manager at First National Bank Wealth and Investments, sheds light on the current dynamics within the commodities market. McCurrie highlights that the surge in commodity prices has been a driver of inflation, with all commodities effectively doubling in value over the last 12 months. This spike in prices has been a key contributor to the inflationary pressures seen in recent reports, such as the US inflation data released two days ago. The mining sector has reaped massive profits from this commodity boom, with iron ore trading at around $200 a ton, significantly higher than its average price of $30 a ton. McCurrie explains that mining companies are capitalizing on these elevated prices, leading to increased output in an effort to maximize profits. However, he also warns that this cycle is cyclical and historically follows a pattern of peaking and then declining every eight to ten years. While prices may remain high for the foreseeable future, eventually supply is expected to outstrip demand, resulting in a correction. When asked about investment strategies in the current climate, McCurrie urges caution when considering exposure to commodities or commodity shares. While prices are at historic highs, he advises against significant investments at this point, citing the cyclicality of the market and the potential for prices to retreat in the coming years. He recalls past instances where commodity shares plummeted as the cycle turned downward, emphasizing the inherent risks associated with such investments. The recent cyber attack on the Colonial Pipeline, a major fuel supplier in the US, caused a brief disruption in oil markets earlier this week. Despite concerns over potential long-term impacts, McCurrie assures that the incident was always expected to be temporary. He draws parallels to the Suez Canal blockage, highlighting that short-term disruptions do not typically result in sustained price spikes. However, he notes that the oil market differs from other commodities due to limited supply options in the short term, which could keep prices elevated. Addressing the ransom paid to the hackers, McCurrie expresses confidence in the cybersecurity measures of major oil companies, suggesting that the incident likely involved internal assistance. He dismisses the notion of repeated attacks having a significant impact on the oil markets, given the heightened security measures in place across the industry. As investors navigate the complexities of the commodities super cycle, the key takeaway is a sense of caution amidst the current price surges. While profits may be enticing in the short term, the cyclical nature of the market suggests that a prudent approach is essential to mitigate risks and capitalize on opportunities in the long run.