Despite an abrupt drop in February and March, the stock market gave investors excellent returns in 2020. However, investment gains notwithstanding, the year was a very difficult one in many ways for the millions affected by the pandemic. We are happy to turn over a new leaf and look forward to a new year.
But turning our attention back toward the market, where should our focus be for 2021 and beyond?
The past two decades have seen strong gains in commodities, including gold. In that time, gold and copper gained well above 400%, compared with 140% for stocks (as measured by the S&P 500, with dividends reinvested) and bonds. This strength in commodities reflected scarcities as growth in the developing world, led by China, took off.
But will commodity scarcities persist? To answer this key question for investors required weighing many complex factors. Our conclusion: the uptrend is nowhere near played out.
Eye on These Five
That’s why we point the spotlight on five closely connected sectors with the handy acronym of TEACH (technology, energy, agriculture, commodities, and health). Energy, food production, and commodities in general are closely interlinked, with scarcities in one area impacting the others.
These sectors also are essential to life, as is health. And technology is ever more critical to wringing the most out of all four sectors. For example, artificial intelligence is being increasingly used to help farmers optimize their planting decisions and maximize crop yield.
You could argue, it’s true, that rapid growth in developing countries (the underlying cause of this century’s commodity scarcities) has enabled those countries to climb further up the economic ladder. That has made their economies less commodity-intensive: as economies develop, they depend less on commodities and more on other areas such as services.
One telling data point is that the gap between developing and developed economies in terms of per-capita energy use has narrowed, from above 7 to 1 in 1960 to about 5 to 1 in 2020. Decelerating growth in demand for commodities in the developing world and declining demand in the developed world might suggest demand pressure on commodities will ease.
Declining Reserves and Increasing Energy Requirements
But it’s not that simple. The strong demand for commodities this century has led to declining reserves for many, including copper, iron ore, and gold, despite much higher prices. Other relevant factors include the course of the pandemic, the massive monies lost in fracking, and climate change.
And there’s one trend and projection overriding everything else. That’s the steadily rising cost of energy production, which the International Energy Agency (IEA) projects will accelerate under any reasonable scenario. These rising costs are a consequence of rising demand and growing scarcities for almost all critical commodities.
The IEA considers several scenarios. In 2015-2019, worldwide energy investment was $1.9 trillion a year. If current trends in energy usage continue, that yearly figure is expected to rise to $2.3 trillion in the current decade and to $2.9 trillion in the following decade.
But if, as we expect, the world increasingly turns to sustainable energies, the numbers rise to more than $3.8 trillion dollars a year in the decade 2031-2040. The transition to renewable energies will require enormous inputs of commodities of all sorts before it becomes self-sustaining. Commodity scarcities will be central to the world’s economy for the foreseeable future and the interlinked nature of commodities means virtually all raw materials will participate.
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