For a long, long time, commodity investors had touted the ‘tangibility’ of that asset class as its most important virtue.
Jim Rogers once said:
“The price of a commodity will never go to zero. When you invest in commodities futures, you’re not buying a piece of paper that says you own an intangible piece of company that can go bankrupt.”
Well, as the events of 20 April 2020 showed, a commodity could go to zero (and even tip into a negative price zone) if there is no longer any “utility” for it.
Jim Rogers also once said: Commodities tend to zig when the equity markets zag. (I could never figure out that one either. DM me if you have).
Apart from their “tangibility” one of the other points that The Commodity Fan Club (TCFC) makes is around their limited supply.
This argument takes the form that, unlike Currencies or Stocks, commodities do not face the threat of devaluation ─ like currencies due to Quantitative Easing for example ─ simply because they cannot be ‘printed’. This theory started to gain ground especially in the aftermath of the Russia-Ukraine War as nations scrambled to make ‘Food Security’ and ‘Energy Security’ their top priorities; and export bans were enforced on everything ranging from Non-basmati rice (India) to Nickel (Indonesia).
Well, nothing could be further than the truth.
Supply shocks do move up prices temporarily, but the high prices eventually attract new entrants into production, creating a supply glut which eventually drives prices down again. (Wheat prices which had spiked up to $12.94 per bushel last year are now averaging closer to their prices in 2021)
There is another point which TCFC rarely factor in: the role of technology in decimating a commodity.
Anyone from TCFC who underestimates the impact of technology on a commodity’s very ability to exist only needs to make a trip to Surat, in India, where 90% of the world’s rough diamonds are cut and polished, to understand this better.
Surat is grappling with a major slump in demand for diamond over the last few years!
Reason? ─ The emergence of lab-grown diamonds!
Mind you, these aren’t ‘fake diamonds’ (which are usually Cubic Zirconia), these are as real as a diamond could get. Made in a lab. At a fraction of the cost of a natural diamond!
And while on diamond, who would have imagined that a material stronger than diamond could exist?
Yet, in 2004, Messrs. Andre Geim and Kostya Novoselov, announced the discovery of ‘a material that is stronger and stiffer than diamond, yet can be stretched by a quarter of its length, like rubber’.
They called it Graphene. And Graphene (being the tough guy that he is) is probably going to crowd out Kevlar soon.
Just goes on to show that commodities aren’t that docile an asset class as they are made out to be.
So, what’s next?
Lab-made Gold? (most definitely not, but that’s a story for a different day
