The Forever Investment Series, Vol. 4: Commodity Scarcity
Listen to this post
We live in the digital age.
Most of us make money working on computers, whether in an office or, nowadays, at home.
So it’s easy to forget that the world runs not only on ones and zeroes or words in the ether.
It runs on stuff.
Actual, physical stuff.
Stuff that needs to be dug up, usually from over there, and shipped to here.
And I don’t mean just oil, although the black liquid supplies one-third of the world’s energy.
I mean things like copper, lumber, steel, lithium, and even water.
Without these commodities, much of what we take for granted would be impossible.
So, why do we fail to invest in them for the long term?
This Is A Real Investment Story
Over the weekend, the Biden administration signed an executive order. The White House wants at least 50% of all vehicles sold in America to be carbon neutral by 2030.
Naturally, that would be a boon for renewable energy.
So, let’s take a look at the commodity likely to gain the most: lithium.
It’s a chief ingredient in batteries for smartphones, tablets, electric cars, and even medical devices. The average electric vehicle has about 22 pounds of lithium in it.
Then there’s the commodity critical to economic growth: copper.
The telephone and cable wires that we use to hook up to the internet are mostly made from copper. So are the parts that help cool our computers.
Steel and lumber make modern construction possible.
Without them, buildings would look a lot different.
And be smaller and less safe, too.
Steel or aluminum, of course, are also the main components of most cars and airplanes, for example.
Water hardly needs an explanation. Without it, life as we know it could not survive.
Not to mention it’s used as a solvent and ingredient in many industrial processes.
It’s necessary for everything from making chemicals to creating computer chips.
Water is also the main coolant in most nuclear power plants.
The thing about all these commodities is that they’re scarce. Some are more so than others.
But it’s hard to find usable stores of any of them. Metals like copper, iron, or aluminum are present in the ground in most places.
But it takes a concentrated deposit to make mining these metals worthwhile.
And these deposits are not distributed equally around the world. Take copper, for example.
Humans have been using it since 8,000 B.C.
But today, Chile has by far the largest copper reserves in the world. At 200 million metric tons, Chile sits on more than twice as much copper as the runner-up. That’s Peru, with just 92 million metric tons.
Chile also produces more than twice as much copper as any other country.
Meanwhile, Australia and China produce most of the world’s aluminum.
You’ll find lithium on every continent. But with a few exceptions, producing lithium only makes sense in a tiny part of the world. This remote parcel of land is one of the driest places on the planet. Called the “Lithium Triangle,” 75% of the world’s lithium supply is found here.
And only Argentina, Chile, and Bolivia have any access to it.
Water may be pretty abundant in many places, but clean water is much rarer.
Getting it where people need it is a huge challenge.
And because these commodities are exclusive to some places, they are also exclusive to some companies.
This means that the biggest and best-placed commodity companies are a great investment.
Especially if you invest when demand for commodities is on an upswing.
See, commodities like lumber, steel, copper, and others tend to see demand at the same time as each other. And this demand comes in waves.
It’s no secret what causes this demand. Remember, these commodities are essential to manufacturing and construction.
So when the global economy grows, demand for these commodities goes up, too. Conversely, when global demand slows down, demand for these commodities falls.
Demand for these commodities is a decent leading indicator of what the economy will do.
Demand for other commodities, such as water or oil, tends to go up or down on its own.
One thing is for sure: It may swing up or down, but over time, demand for most commodities trends upwards.
For example, global copper demand is projected to grow 31% by 2030. Yet prices only just broke above $10,000 per ton for the first time in 10 years.
But Bank of America thinks it will soon hit $20,000.
Lithium demand looks like it will grow almost sevenfold through 2030.
Water, steel, aluminum, and other commodities follow similar trends.
How to Invest
There are many ways that you can invest in commodities.
You can buy the producers of them. Mining companies like Rio Tinto (RIO) produce vast amounts of commodities and pay attractive dividends to shareholders.
You might also invest in infrastructure like shipping or pipelines that move these commodities from one place to the other.
But the purest way to invest in commodities is through exchange-traded funds, or ETFs. Commodity funds tend to mirror the price of a specific commodity’s futures contracts.
Finally, if you’re seeking broad exposure to a specific sector, you might want to own an ETF that has many different companies that benefit from higher prices or commodity demand.
For example, the Global X Lithium & Battery Tech ETF (NYSE: LIT) is a fund that has 38 different holdings. The companies in the fund include mining firms, battery makers, and automakers. You’ll find shares of Albemarle Corp. (ALB), Panasonic Corp (PCRFF), Tesla (TSLA), EnerSys (ENS), and more.
The ETF has been in the Green Zone (our buy zone) of TradeSmith Finance since July 1, and a strong uptrend in momentum continues to benefit shareholders.
Tomorrow, I want to dig into the earnings season around one of my favorite industries.
That would be cybersecurity. This industry is also a forever investment trend, given the importance of cybersecurity in our 21st-century digital economy.
I’ll be back in the morning with a deeper dive into McAfee.