Materials Risk

Crop failure was common in the Soviet Union. The cold climate, frequent droughts and mismanagement led to regular shortages of basic foodstuffs. 1972 was one such year. High temperatures scorched Europe leading to drought across much of the continent. By summer much of the ‘Black Earth’ region (a belt of rich and fertile soil stretching eastward from Moldova and the Eastern Ukraine) was in danger of being ruined. Coming straight after a poor harvest the previous year, the Soviet leadership realised that a catastrophic wheat crop failure meant famine was becoming a very real danger. read more

The advantage of seeing things before other investors is that you are able to capture the sweet spot in a trade, and then get out before things go a bit crazy. This can often be the movement in price from “don’t touch that thing with a barge-pole” in which everyone is sure it’s going to crash and burn, to merely “it’s still crap”. It’s more often the middle of a trade where momentum builds and new money comes in that the real money is to be made. It’s at that point which many investors who got in early start to get nervous and bale out. read more

Chinese commodity markets have become an increasingly important indicator for other sectors of the global economy, especially dry bulk commodities such as iron ore, steel, coal and grains. For example, iron ore and steel rebar futures increased by 120% and 86% respectively in the twelve months to mid-May 2021, the latter seeing prices spike by 50% in the in the first two weeks of May alone. Other futures markets such as that for coking coal have also seen strong gains.

Chinese commodity investors have piled into these markets on speculation that demand for infrastructure commodities post COVID will surge and that supply will remain constrained. For example, environmental and safety inspections have affected domestic coal output. read more

“Once you see headlines about the discovery of new oil reserves or wind farms popping up outside major cities, when you see mines coming on line, when you discover that stockpiles of all kinds of commodities are rising, those are fundamental shifts – then its time to get your money out of commodities. The bull market will be over.” – Jim Rogers

A fundamental shift tends to define the end of a bull market. In the late 1970’s it was the discovery of new oil deposits in the North Sea and Alaska. As those fields came online oil production exceeded demand for the first time in years. read more

Classical economic thinking is based on the principle that markets tend towards equilibrium. This situation is defined as the point at which supply and demand are balanced, and in the absence of external influences, prices typically remain unchanged. In economics terminology, the market clearing price has been achieved.

Economic theory assumes that market participants act on the basis of perfect knowledge, or at the very least act based on rational expectations. This means that even though not all participants are equally as informed, there is one single optimum, ‘rational’ view of the future, and eventually all participants in the market will converge on this view. read more

One of the most important attributes for any successful long-term investor is adopting (and keeping) a low time preference. This means you don’t worry about short term fluctuations in the market, but instead have your sights firmly set on the bigger picture. In Jim Rogers book, Hot Commodities, he gives the example of investing in gold during the 1960’s and 1970’s as the perfect example of taking that longer term view:

“In the late 1960’s, for instance was at $35 per ounce. In 1975, it rocketed to $200 in anticipation of the recent decision by the US government to allow Americans to own gold again. Within the year, gold lost 50 percent of its value, plunging back to $100. A lot of people sold their gold. Too bad for them, because gold proceeded to go straight up eight and a half more times – to $870 an ounce in January 1980.” read more