The gold stock-to-flow model

Commodity markets are typically interpreted through the lens of changes in supply and demand and the impact on inventories in any particular year. This model works for most commodities that are ‘consumed’ (crude oil, wheat, etc.), but is useless to understand the value of those commodities used for investment purposes. I think this distinction is so important for investors to appreciate that I’ve shared how wealth management company Incrementum outlines it (highlights my own).

Iridium’s spectacular surge underpinned by hydrogen hype and supply cuts

The best performing commodity of 2021 is a raw material that most people will never have heard of – iridium. For a precious metal, iridium has achieved the types of returns that gold and silver investors could only dream of. Since the start of 2021 the price of iridium has increased by 140% to $6,300 per oz.

What is the Cantillon Effect?

When the US Federal Reserve and other major central banks embarked upon their quantitative easing programs shortly after the Global Financial Crisis many feared that the impact would be inflationary.

Soybean prices: The top 10 most important drivers

1) Weather
The weather has a significant impact on crop yields and thus overall agricultural production. The wrong type of weather at the wrong time in the planting cycle, even if not prolonged or extreme, can also adversely affect the production of soybeans. The weather can also affect the shipment and logistics of transporting crops to market.

The rare earth age is back

Published in October 2015, David S. Abraham’s book, The Elements of Power “tracks the trail of rare earth metals from mine to gadget”. Working in the Japanese Ministry of Economy, Trade and Industry he had a ring-side seat to watch how the escalation of a territorial dispute between Japan and China evolved to a situation where China cut off its rare earth metal exports to Japan. As Abraham’s outlines, China was now using a new geopolitical trump card with its competitors, “The battle over resources, which started when the first person learned how to coax metal from stone, had expanded into a larger battle-a war over the periodic table.”

The Desert of the Real

“In an age of images and entertainment, in an age of instant emotional gratification, we neither seek nor want honesty or reality. Reality is complicated. Reality is boring. We are incapable or unwilling to handle its confusion.” – Ryan Holiday, Trust Me, I’m Lying: Confessions of a Media Manipulator

Stranded: Why some of the largest oil producing countries face an unstable future

Up until now investor attention has focused on the downside risks to the publicly traded oil industry resulting from a transition to a low carbon future. Specifically the risk that companies will have to write down ‘stranded’ assets and face declining demand for their products. Yet there is a much bigger potential problem that investors may need to face: sovereign credit risk of state owned oil producers and escalating geopolitical conflict.

Coffee prices: The top 10 most important drivers

1) Concentrated production
There are two main commercially grown types of coffee beans: Arabica, which accounts for 70% of the world’s coffee, and the Robusta bean which is far cheaper and easier to grow. The largest producer of coffee is Brazil accounting for about one-third of global production and about half of the worlds arabica output. The second major producer is Vietnam, accounting for just under 19% of global output and around half of robusta production. This concentrated output means that supply disruptions in one or both of these countries can have a significant impact on the price of coffee.

Cycles within cycles

In a previous post I explained the various long-term cycles that tend to characterise commodity markets. Recall that there are two types of long term cycle. The first type sees prices rise for 15–20 year super-cycles, and then slide over the following 10–15 years. Since supply is price inelastic an increase in demand results in higher prices until eventually excess investment leads to a flood of supply and the cycle resets. This shorter of the two cycles takes 25-35 years to complete.

Likely turn in potash prices suggests secure fertiliser supplies now

Rabobank has published new research on the global potash industry highlighting the potential for further price falls but that buyers need to keep a close eye on the long term as suppliers may be close to managing output more effectively providing a floor to prices. The outlook for potash prices is especially important for US farmers who are likely to be strong buyers of fertiliser as the spring planting season begins.

Palladium continues to be ‘the Tesla stock of commodities’

Since the start of 2020 gold prices have increased by one-quarter, silver prices are up by 50% and the price of palladium up a respectable 14%. What then of platinum, the poor cousin to the other stellar performers in the precious metals space? Down 2.5% year to date! The expectation by many investors betting on a rebound in platinum prices is that it will eventually play catch-up versus palladium as auto-catalyst manufacturers substitute expensive palladium, for cheaper platinum.

Platinum prices: The top 10 most important drivers

1) South Africa
As of 2016, South Africa produces approximately 70% of the world’s newly mined platinum. As a result, conditions in South Africa are crucial to the supply of platinum. Given that South Africa’s political environment has become increasingly volatile in recent years, platinum supply is subject to a fairly high degree of political risk. Platinum production from their mines have been hit by labour disputes and foreign currency instability. These risks were felt particularly hard in 2014, when workers for for a number of miners all went on strike hitting 40% of global platinum production. Geological problems have also hit the nations miners with flooding causing the shutdown of mines in the past. Meanwhile the country’s crumbling electricity infrastructure has also caused production to be delayed as intermittent or longer electricity cuts delay platinum production.