Sean Brodrick: Sean Brodrick here. Today I’m with Karim Rahemtulla of Beyond the Dollar. I’ve been watching OPEC and the oil markets for months now. Today, Karim is going to shed some light on a theory he has about how commodities behave. Welcome, Karim.
Karim Rahemtulla: Good to be here, Sean.
Sean Brodrick: At the last conference we had, you gave a presentation on something you call “the commodity supercycle.” Could you explain what that is?
Karim Rahemtulla: Yes. It’s even more pertinent today. What we’re seeing with the new administration with Donald Trump is that he’s promised a massive infrastructure project. Now, whenever you hear the words “massive infrastructure project,” the first thing that comes to mind is raw materials. Raw materials is where the commodity cycle busted because they were all focused around China’s big growth spurt.
What could happen in the U.S. in the next three to five years - maybe in the next three to 10 years - is we could have that same type of commodities demand that China had back in the ‘90s and early 2000s. Because if you’re talking about a massive infrastructure project and you consider the size of the U.S. infrastructure, you could be talking $2 trillion to $3 trillion in spending in the years ahead, and that goes directly to the commodities markets.
In addition to that, you’re going to have stronger economic growth purportedly with better jobs and more income. Those people are going to be buying houses, buying cars. It could be a massive inflationary cycle too, but it could be a massive cycle for commodities demand. So the commodities space and the natural resource space is a place you really want to be.
Sean Brodrick: Excellent. So as you know, I think OPEC is having some real problems and oil prices are going to stay around $50 through the end of this year - partly because with OPEC members, it’s like herding cats. It’s very hard to get them to agree on anything. Where do you think oil is going in the commodities supercycle?
Karim Rahemtulla: I think oil is actually going to be reacting differently from other commodities. I think the reason for that is, as you mentioned, OPEC. It has a major problem. The Saudis need oil prices to be higher.
However, at the same time, you’ve got new energy policies that are going to come out in this administration. They’re going to keep energy prices lower because they’re basically going to be “drill, drill, drill.” So if you’ve got any cut in supply from OPEC, you’re going to have an increase in supply in the U.S., and that’s going to keep a lid on oil prices for a while. You might get spikes of up to 60 or 65, but to bet that oil’s going to 90 or 100 anytime soon would be a bad bet.
Sean Brodrick: Especially when we just saw OPEC production hit a new high... And, of course, there’s always Russia, which is the wild card there. It produces a lot.
Speaking of energy commodities, I’ve been watching lithium pretty closely now. I think there’s going to be a major supply crunch in the next decade. Not next year - we’ll probably go into surplus next year. But the supply-demand trend points to tremendous demand, especially coming out of Asia. What other things have you been watching?
Karim Rahemtulla: Well, now I’m seriously starting to look at the base commodities... looking at copper, looking at zinc, looking at iron ore. These are the things that are going to come into the forefront in the next few years if the infrastructure growth plan comes to fruition. I think it will. And at this point, you’ve got this great opportunity because commodity prices are super depressed and the U.S. dollar is super high, which means commodities are even cheaper because they’re priced in U.S. dollars.
So what you’re looking forward to in the next few years is a weakening of the U.S. dollar, because we’re going to have so much spending and so much debt that we’re going to accumulate that it’s going to hammer the dollar at some point.
At the same time, you’re getting the opportunity to buy commodities with really expensive dollars that you own. You’re really in the catbird seat.
Sean Brodrick: Well, we’ve already seen price moves in things like cement, nickel, copper and iron. All those things are already moving, but they’re so far off their highs, there’s just so much room left...
Karim Rahemtulla: That’s the thing. You don’t want to get sucked into thinking, “Oh, these things have already moved up.” If you look at a chart, these things are on the bottom. They’re not even close to moving back up again.
Sean Brodrick: Things like copper and iron, those are the things you call “the dark commodities,” isn’t that right?
Karim Rahemtulla: Yeah. You have to differentiate. Most people think commodities and they automatically think of precious metals included. Well, precious metals play a totally different part in this game than do industrial commodities, because precious metals, for the most part, are used as currency, hedges and proxies, but they’re not used up in the commodities process where you’re building roads, bridges, things like that.
Sean Brodrick: Well, I have a couple unique commodity plays in my Oxford Resource Explorer portfolio. One of the things that’s impacting gold right now is the strength of the dollar. So how is the strong dollar affecting those commodities now?
Karim Rahemtulla: It’s the best of all worlds, because the strong dollar is actually keeping commodities prices down since they’re priced in dollars. Now our thesis at Beyond the Dollar is that the dollar is peaking. You might have a further 5% upside, but you have a very significant downside, especially if inflation kicks in. Sometimes people think inflation kicks in. That means interest rates are going to go up and the dollar’s going to go up. It’s true. Interest rates could go up, but you could have the dollar being pushed down by the central banks because they don’t want the U.S. to be anti-competition... and at the same time, if inflation goes up, one of the biggest and best hedges against inflation is gold.
So you’ve got a lot of different things going on right now. You might actually be able to see a situation where you’ve got a relatively strong dollar and relatively strong gold prices, as we’ve seen in the past.
Sean Brodrick: Just to touch on those other things. You mentioned iron and copper and stuff like that. We have seen big price moves in them as the U.S. dollar goes up, but I think what you’re saying is this is the action we’re seeing during a strong dollar. Once the dollar starts to weaken, they could really take off, right?
Karim Rahemtulla: If you look at a chart, we are still at the bottom of this commodities supercycle that began in the ‘90s that’s already gone from here. It peaked in 2008 and 2009 and it’s crashed ever since then. We’re still at this level. So to think that we can’t go up, even halfway or three-quarters of the way with all the spending and stimulus that’s coming down the pipeline, would be the wrong way to think about it.
I would rather bet that we are at the beginning of a commodities supercycle than at the end of one.
Sean Brodrick: Well, as always, it’s great to catch up, Karim. Thanks very much.
Karim Rahemtulla: I agree. Take care, Sean.
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