The energy transition e digital will require, in the coming years, large quantities of raw materials such as copper, lithium, zinc and other materials. Second Rohan Reddy – research analyst at Global X – this could unleash a new supercycle of commodity, offering excellent medium-long term investment opportunities. In the immediate future, however, the inverse correlation with the dollar and the intrinsic value of commodities can provide stability and a hedge against inflation.
What influences the prices of raw materials
To invest in commodities it is necessary to understand the factors that influence their price and valuation, but also the essential role that raw materials play in new generation technologies and the investment opportunities deriving from these dynamics.
On the supply side, events such as natural disasters, geopolitical conflicts and recessions, can interrupt the procurement of a commodityeven as governments maintain strategic reserves, and inventories allow companies to mitigate the imbalance between supply and demand.
The question is also influenced by the fact that raw materials with similar characteristics can be substituted for each otherin some cases: for example, copper can be replaced by aluminum for car wiring and pipes. Utilities, on the other hand, often replace coal with natural gas when gas prices are low.
An important thing to consider is that i Commodity prices tend to fluctuate inversely with the strength of the US dollar, a universal standard for pricing commodities. Thanks to their intrinsic value, raw materials can be considered additionally one hedge against inflation and they tend to gain in value as consumer prices rise.
A new supercycle is upon us for raw materials
Commodities are also cyclical. Their prices generally rise and fall based on economic activity. Historically, commodities have shown a consistent appreciation right at the end of economic cycles: in fact, in the late phase of the cycle, inventories are low and supply is lower than during the expansion.
Then there are supercycles: booms and corrections in commodity prices that last decades and are triggered by structural imbalances of supply and demand. For example, as an underdeveloped country or region begins to industrialize, their demand for raw materials increases as does competition for global supplies. When demand increases faster than supply, prices rise.
And new commodity supercycle it could be triggered by the global economy’s transition to clean energyincluding electric mobility, wind and solar energy and the modernization of networks, given the essential role that many commodities play in the cleantech sector.
How to exploit the characteristics of commodities
Raw materials continue to represent ainteresting potential inflation hedge it’s a store of value in times of economic recession and geopolitical instability. Because they are often negatively correlated to the US dollar, they can also help diversify a portfolio. Furthermore, invest in different commoditiesfor example base metals, uranium, corn, etc. can provide a wide exposure to a wide range of industriesincluding mining, agriculture, energy and more.
There are several ways to take advantage of these features, depending on the type of exposure the investor wants. An interesting option are the Mining ETFs, which track commodity prices indirectly (e.g. the GLOBAL X COPPER MINERS UCITS ETF). Due to the fixed costs of mining, these titles represent a leveraged investment in commodities: Miners can increase production when profits increase, using operating leverage to improve profits in bull markets. For this reason, despite having higher levels of volatility than the underlying commodities, mining ETFs are often an attractive option for investors with a favorable view on these markets.