Goldman Predicts New Commodity Supercycle To Start In 2023
Goldman Sachs has published a new report.
It may contain the keys to unlocking huge gains in 2023 and beyond.
The report is titled 2023 Commodity Outlook: An Underinvested Supercycle.
It contains the basic foundations for what could be yet another commodity supercycle.
The last supercycle ran from about 2002 to 2008.
Commodities climbed, but the gains in mining and oil stocks were stratospheric.
A combination of factors – inflation, ESG, and massive underinvestment – is potentially driving another one altogether.
Even if it’s just part of what happened before, the gains could be massive.
Below are the top five takeaways from Goldman’s report.
5 Takeaways From Goldman's Supercycle Report
We’ve highlighted the most important parts of the report.
The fifth one is a simple chart from the chart that sums up the entire situation and will have you keeping a close eye on the commodities sector.
First though, credit where it’s due, you can download a copy of the report by going to this page here.
Now, let’s get into it.
First off, commodities have been a relative disappointment this year.
Traditionally they are the place to be when inflation is soaring.
This time around, however, commodities didn’t excel across the board.
Goldman addresses that:
“Spot prices retraced nearly to 2021 levels as financial deleveraging and physical destocking.”
The deleveraging is true.
The Fed rate hikes have targeted money supply and they’ve succeeded.
Everything was held back.
Here’s the next one:
“From a fundamental perspective, the setup for most commodities next year is more bullish than it has been at any point since we first highlighted the supercycle in October 2020.”
This is from the lead of the report.
It starts by making a big prediction and shows what to look for to know you’re in a bull market for commodities:
"Commodity supercycles never move in a straight line; rather, they are a sequence of price spikes, witheach high and low higher than the previous spike."
Commodities are volatile.
They will have big surges and major corrections during a bull market.
The key though – as it is in most bull markets – is that after each rally in a commodity or the entire sector, the new lows are higher than the old lows.
Higher highs are important, but higher lows are the signal you’ve got a bull market and it’s time to go for a ride.
Now we get to the fundamental foundation for all this.
"Despite a near doubling year over year of many commodity prices by May 2022, capex across the entire commodity complex disappointed."
What’s that mean?
It’s basically saying that years of underinvestment in capex (e.g. building new mines) are leading to potential significant supply decreases.
And in commodities, supply must keep up with demand or prices are going up.
Here’s an example of how bad the underinvestment in capex is in copper:
"We estimate that in 2022 sanctioned copper projects will amount to only 263kt, essentially the lowest approval volume in the last 15 years."
That’s a 15-year low.
It will hamper long-term supply.
And if the emerging world bounces back in the second half of 2023, watch out, copper could be a big mover.
Finally, here’s a chart that really shows the scope of the underinvestment in commodities.
It shows how deeply capex has fallen over the last few years:
Capex spending has fallen off a cliff.
Copper (the light blue line) is already back to levels not seen since 2010.
Oil and gas (dark blue line) is now lower than it was then back in 2003 when a major bull market was just starting to unfold.
Commodities are driven by supply and demand.
Global economic upheaval and malaise has tamped down demand for most commodities.
However, if and when this changes, the years of underinvestment will have supply lagging far behind demand. It could take years and much higher prices to get back to the top of the cycle.
