Federal Reserve leaves interest rates unchanged

With Reddit and Gamestop dominating the news of late, one may be forgiven for having missed the fact that the Federal Reserve kept its benchmark interest rate anchored near zero following the conclusion of its two-day meeting Wednesday. This is shortly after Goldman Sachs proclaimed that we are the dawn of a new commodity supercycle.

While last year’s strong rebound in many commodity prices might be viewed as a “V-shaped vaccine recovery”, the bank contends it is just “the beginning of a much longer structural bull market for commodities”.

“Looking at the 2020s, we believe that similar structural forces to those which drove commodities in the 2000s could be at play,” Goldman argues. (“2021 Commodities Outlook: REVing up a structural bull market”, Nov. 18, 2020)

The 2000s were transformative for metal prices, which experienced a tectonic demand boost from industrialisation and urbanisation in emerging nations, China in particular.

Copper, the bellwether of the industrial metals sector, rose from under $2,000 per tonne in 2000 to a record high of $10,190 in February 2011.

The Reuters article then explains why Goldman believes this will transpire.

“Policymakers around the world have signalled that full employment, and increased income for low-income households is a key part of post-COVID policy,” Goldman says.

Such redistribution policies are commodities-positive since lower-income households tend to spend more of the extra money they receive.

Financial stimulus after the last crisis benefited primarily higher-income groups where the marginal propensity to consume out of wealth is a meagre 3%, the bank estimates. Richer people simply don’t need to spend the extra money on more things, while poorer households will consume just about all of it.

Rising wages, meanwhile, would also lead to faster home formation, which is commodities-intensive in the form of construction and household appliances.

Indeed, Goldman’s view is that increasingly synchronised social policies in the wake of the pandemic are similar to those of the 1960s, which saw the United States launch its “War on Poverty” campaign.

“We believe a better analogue to the current environment is the super cycle of the 1970s rather than the 2000s,” it adds.

A kind of super supercycle, as it were, with industrial capital expenditure running at 2000 levels and social rebuilding generating a 1970s style consumer boom.

DIDN’T SEE IT COMING?

The other core plank of Goldman’s supercycle thesis is the lack of supply ready to meet any structural shift in demand.

Capital expenditure in the commodity complex was already low before COVID-19. It has plummeted further in recent months as producers prioritised maintaining existing operations.

China, meanwhile, has been soaking up the rest of the world’s surplus stocks of metals such as copper, aluminium and iron ore.

Goldman is particularly bullish on copper with a 12-month target of $9,500 per tonne even after its turbo-charged rally from the March 2020 lows of $4,371 to a current $7,935.

But copper is only one part of a broader call for a 30% return on commodities this year.

This hypothesis that Goldman has is not consensus, and many firms do have differing opinions. However, Goldbugs would be encourage by the predictability of the Federal Reserve in keeping the interest rate constant. Here is a video of Powell saying the downturn has not fallen equally on all Americans, and rates will remain unchanged.

Conclusion

The best way to get a leveraged return on a commodity supercycle is to buy stocks that gain directly from this. Low interest rates have been the norm longer than a decade, and will likely remain as such. An excellent way to expose yourself to the upside is to purchase high quality small cap mining stocks. Stocks of this nature have the potential to increase many multiples of 100% when the mine advances.

We remain bullish on both Tocvan Ventures (CSE:TOC) and Etrucus Resources (CSE:ETR). We recently published our report on ETR, and believe it to be very cheap right now, trading at 34 c a share, this stock is worth north of $1/share, with peers at a similar stage experiencing 1,100% growth in 2020.