Commodity Supercycle

Ladies and gentlemen, this is not new news here. We are currently in a bull market of a commodity supercylce. Basically, commodity prices are soaring around the world for ALL commodities.

Let me explain the basis of a commodity supercycle. An upswing in this cyclical pattern is usually due to a demand shock. There is huge demand for commodities in east Asia. This is mainly, due in part to China and India's westernization. They want 'stuff': cars, houses, fast food chains, etc. As more and more Chinese leave their rice farms and urbanize in hopes for a better quality of life, the demand for base metals, oil, uranium, and other commodities grows. Hence, a demand shock.

The supply side is different and here's where the cyclical pattern comes in. A commodity supercycle looks kind of like a basic graph of a business cycle. That roller coaster look is what defines cyclical. It's this pattern that drives my interest in commodities as a whole, and why there's so much easy money to make. When the graph of the cycle is at its low point, or trough, commodity prices are very, very cheap. This drives miners, refiners, and suppliers out of the market. There business profits are directly correlated to the commodity that they are supplying. When supply and prices hit rock bottom, combined with a demand shock sends commodity prices soaring.

The businesses that were able to stick through the low prices, will now prosper. Other companies, new and old, will begin exploration, and attempt to get a piece of the action. Example: uranium was trading at $7 /lb, it is now trading at $75 /lb. This difference came in a rather short period of time and the price of uranium will continue to thrive as it takes time to get more and more U3O8 mined.

This brings me to my next point. Once the upswing of the commodity supercycle begins, it takes time for other suppliers to get in the market. In the case of mining or oil drilling, there needs to be financing, exploration, drilling, setting up the mine or oil rig. This all takes a large amount of time, and happens to be just about where we are at in the commodity upswing.

I feel that this particular upswing is special because of the huge demand shock that is taking place. China's use of natural resources is immense, and increasing exponentially every year. It will be a while for the supply to catch up to the demand. In the mean time we can all pad our portfolios with commodity investments.

Now that I've explained the commodity supercycle, I would like to get into the meat of what I wanted to talk about; how the government reacts to all of this. Historically, there is little action on a federal level at first. In fact, commodity enterprises are often subsidized at the government realizes the shortage of natural resources. It also takes a large amount of capital to set up and produce most commodities. Once they get them up and running, they then take away their subsidy, because the company can survive on its own due to rising commodity prices. As prices keep going higher and higher the government starts to lick their dirty lips, and rub their filthy hands together in anticipation of the large taxes that they are about to stick on these companies, and in many cases, the government might just end up centralizing that industry.

Depending on what part of the world you live in, we are somewhere in the middle of the subsidy, taxation, or centralization of the commodities industry. Lets look at a couple of examples. Rising gas prices has the U.S. producing ethanol. They are heavily subsidizing this industry on every level, from the farmers, to the oil company that mixes the ethanol with refined gas.

The oil sands companies transition from subsidies to taxes is something that I have experienced on a personal note. They were heavily subsidized, being that Canada realized the potential of these companies. Now there are talks of heavy taxes on these companies. Side note: Canada is really shooting themselves in the foot with those taxes. They'll figure it out sooner or later.

Mexico, Venezuela, and Iran have government control over their oil industries. They realize the money involved, but fail to run these industries at optimum levels. This is a trait of the majority of government controlled markets. Just this mourning, I read that Zimbabwe has announced that they are centralizing their diamond market. I expect to here much more news of this nature in the coming years.