if we are at peak inflation now, as some suggest, do you believe it's time up for the commodity trade? Freeport, Anglo, Alcoa has vicious pull backs this week from highs, with some of those having key week reversals. If you've made money, take shelter and come back another day, or stick it out because the longer-term structural story is intact?

Eoin Treacy's view

Thank you for a topical question. The big question at present is whether we are in a cyclical or secular bull market for commodities and industrial resources in particular.  

The cyclical argument runs that the current conditions are similar to the post credit crisis rebound. From early 2009 commodities rallied from depressed levels to new highs inside of three of years. Then monetary conditions tightened as balanced budget measures were imposed in both the USA and Europe. As monetary conditions tightened, and the Dollar strengthened, commodities peaked went through a crushing bear market for the next five years.

The secular argument is demand for renewable energy industrial resources is going to trend higher for years to come as the world turns to copper as a substitute for a portion of oil demand. Battery factories are under construction everywhere and when they open it will create demand for copper, nickel, lithium, manganese and cobalt. EVs, wind turbine and distributed power are also much more intensive sources of demand for these metals than the existing infrastructure.

The EU lowered the cap on carbon emissions again this week. They are actively supporting the price of carbon to ensure a competitive environment for renewable energy. That’s one of the EU’s clearest long-term policies and they are beginning to insist everyone they trade with follow a similar path. Russia’s invasion of Ukraine has made energy security a national priority everywhere. That is likely to survive any medium-term correction in asset prices.

I remain sympathetic to the secular bull market argument for industrial resources because supply is not about to materialize out of nowhere. New large-scale mines are aspirational for most companies. Saudi Arabia, Congo and potentially Afghanistan are the best potential sources of new supply but that’s with a timeline stretching into years.
Near-term selling has been indiscriminate. There is a real possibility we are going to see a serious global growth scare this year and next. There is clear scope for major stock markets to unwind their post pandemic surges. That could take the Nasdaq-100 down to 10,000. If that unfolds, contagion into most other sectors is inevitable. However, resources are likely to be the first to bounce back when monetary policy eases because of the secular case above.

The VanEck Gold Miners ETF pulled back in a dynamic manner over the last couple of days to post a weekly downside key reversal. That highlights contagion selling since gold continues to range between $1900 and $2000.  

The decision on whether to stick with positions or sell in the hope of buying back cheaper is going to hinge on how leveraged one is and how much of a pullback you are comfortable with. That’s going to be different for everyone. I’ve hedged my trading positions with my Nasdaq-100 short and I’m more worried about my solar investment than copper miners because of the built-in leverage in many solar business models.