Three ways to play the “commodity supercycle”

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Three ways to play the “commodity supercycle”

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Published Date: 2021-03-01 | Source: INCE|Connect | Author: Lester Davids | Peet Serfontein | Mark Weetman | Unum Research

Three ways to play the “commodity supercycle”

According to a JPMorgan report, the fifth commodity supercycle has started, and in this week's Share360 Thema report we want to highlight the various ways by which traders and investors could participate in the potential, explosive move higher in commodities.

The interconnectiveness of commodities in a Supercycle


"...buy gold, buy silver, in fact buy everything ....."

Mark Weetman, Unum Capital Trading Desk, on the Offshore Report, Classic FM

During a supercycle, there is a tendency for the basket of commodities to simultaneously, and collectively move in a single direction, resulting in an all "all commodity rally".

How can I get involved?

Investors can gain exposure to this mega rally in several ways.

1.Trades can be implemented directly in the underlying commodities via futures, options or contracts for difference (CFDs);

2.You can own the economic benefits by investing in an exchange traded product (ETP) that either have exposure to the underlying commodity or bundles together companies that derive their value from the commodity price;

3.Investments can be made in individual companies specializing in the mining and/or production of the various commodities.

"Or you could do all three!"

"Although we subscribe to the supercycle thesis, commodities look over-extended in the short to medium-term, and markets don't typically go up in a straight line. So possibly expect some pull back in prices and use these opportunities to accumulate commodities in a selective manner."

Peet Serfontein and Lester Davids, Unum Research team

Risk vs Reward

The risks of investing in commodities, include:

1. the fairly obvious, fluctuations in the underlying commodity which could affect revenues and profits, and result in share price volatility;

2. Geopolitical factors: In some cases, operations are located in higher risk areas (wars, climate/weather); executive management face ethical choices, for example becoming too close to politicians to secure approval for mining ventures, bribes for licenses, and environmental short-cuts.

3. Employee safety - underground miners risk loss of life, especially in deeper level mining ventures.

4.Government Regulation: Ensure that mining houses abide with labour, environmental laws and ensure that business activities support all stakeholder groups.

The rewards of investing in commodities, includes:

5.Offers an inflation hedge, unmatched by most other asset classes;

6.Diversifies an equity heavy portfolio

7.A higher level of volatility, which is beneficial as it allows for tactical Long (Buy) and Short (Sell) opportunities.

What are the main commodity groups, I can trade?


Commodities are generally split into two types, hard and soft commodities. Hard commodities are typically natural resources that must be mined or extracted whereas soft commodities are agricultural products or livestock.

As traders we tend to group the various commodities as follows:

Precious Metals: Gold, Platinum, Palladium, Rhodium, and Silver

Supply/demand dynamics have been driven, for Gold and Silve,r by safe-haven status, inflation and debasement of fiat currencies, and for platinum and palladium fluctuations in production, automobile and jewelry demand.

Industrial (Base) Metals: Lead, Zinc, Tin, Aluminium and Copper.

Mainly driven by (1) global growth expectations, demand out of China who remains one of the biggest consumers (2) new technologies, including inclusion in batteries for electric vehicles (EVs) and other technologies (3) new and upgrades to existing to infrastructure.

Energy: Oil, Natural Gas, and Heating Oil

For the group, supply/demand dynamics have been driven by (1) developing countries global growth expectations which includes demand from developing countries (2) geopolitical sentiment (3) weather patterns in the case of Natural Gas and Heating Oil.

Softs: Wheat, Corn, Soybeans, Cocoa, Coffee, Sugar, Livestock

Supply/demand dynamics have been driven by (1) demand from the east, specifically China (2) adverse weather conditions, and (3) expectations around human consumption.

So what now?


While the aforementioned factors are expected to continue to increase the demand for commodities, prices have, over the short to medium term, largely discounted these expectations.

Does that mean that you have missed the "commodities" boat?

We don't think so.

As a research team, we are constantly monitoring the commodity markets, to determine the key levels at which traders / investors could look to re-enter should the underlying commodities, ETFs or miners retrace.
In the following Share360 article we will identify actionable trade and investment commodity ideas that you can implement into your own portfolio.

To gain exposure in both the local and offshore commodities market, get in touch with Unum Capital Trading Desk on 011 384 2900 or email tradingdesk@unum.co.za.

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