This month’s blog is an introduction to a more detailed, forthcoming research article by Auspice Capital – stay tuned.
Like many things within financial markets, the link between commodities and the overall economy and global stock markets is a bit of a mystery. Rarely made is the link of tech and commodities. They seem juxtaposed at opposites ends of the investment spectrum - new school versus old school: the internet, cloud and artificial intelligence (AI) versus picks, shovels, and drill-bits. However, we believe the link is strong and growing stronger and may be an important factor in the extension of the commodity cycle that started in 2020, only two years into a typical commodity cycle length. See Chart 1 Below.
Chart 1 – Goldman Sachs Commodity Index (GSCI) Bull Markets by Decade.
Source: Auspice Capital & Bloomberg. You cannot invest directly in an index.
Indeed, we have seen a litany of bullish commodity outlooks in past weeks:
Goldman – “Commodities to gain as central banks cut rates”
Bloomberg – “The bullish case for commodities”
Bank of America – “Commodities Poised For Comeback In Investor Portfolios”
Globe and Mail – “Out of nowhere, commodities are on a run” (we disagree that the run is “out of nowhere”, however)
The link between commodities and the current tech boom and AI itself is driven by demand for data centers, computer chips and electric vehicles (EVs). For each of these technologies to grow, the demand for commodities is massive. We believe AI is a proxy for many technologies and indeed this tech boom we are currently experiencing. The reality is AI requires more hardware and more powerful chips than typical computing. Even the demand for space for large data center operators such as Amazon, Microsoft, Google, Meta, Oracle and TikTok owner ByteDance is being challenged, alongside significant problems with power supply - "access to electricity, is not keeping up." – Reuters[1].
But it is not just the massive power demand, other commodities are at play and thus under pressure. There is a link from AI demand to both precious and industrial metals. The chips themselves, while commonly known to be silicon based, require interconnects. Interconnects were commonly made from aluminum but are now typically cobalt or copper.
Tying back to power and the data centers, we recognize the importance of copper in the ever-expanding demand for power. Electricity grids rely heavily on copper in everything from turbines that convert mechanical energy into electrical energy, batteries, and the wires and transformers that carry that power everywhere. "Our modern world would not function as it does without it” according to a recent article “As AI Continues to Dominate Headlines, Copper's Critical Role Comes Into Focus”.
EVs are no doubt part of the future – as reported by Bloomberg[2], and according to the International Energy Agency, the typical EV requires 6 times the mineral inputs of a conventional car[3].
Most commodity cycles last around 10 years - this one has rounded the corner on a 2-year pause, a typical consolidation as seen in the 1970s, 1980s, and 2000s commodities bull markets[4]. Alongside Decarbonization, Deglobalization and Demographics[5] - inflationary drivers that weren’t present just a few years back - we now have a massive new player in commodity demand - India[6]. We think commodity cycle drivers have never been stronger in history, and a new factor like the tech boom may re-awaken the sleeping giant. Indeed, agriculturals, precious metals, and energies have all exhibited new signs of strength recently.
If you don’t have a 5-10% allocation to tactical commodity or CTAs strategies, contact us today at info@auspicecapital.com
Stay tuned for the forthcoming research article – coming soon.
References:
[1] https://www.reuters.com/technology/european-data-centres-grapple-with-ai-driven-demand-space-2024-02-27/
[2] https://www.bloomberg.com/news/articles/2024-03-10/five-key-charts-to-watch-in-global-commodity-markets-this-week
[3] https://www.iea.org/reports/the-role-of-critical-minerals-in-clean-energy-transitions/executive-summary
[4] See Chart 2 - https://www.auspicecapital.com/alt-invest/2024/2/2/not-a-world-war-but-a-world-at-war
[5] https://financialpost.com/investing/structural-shift-in-inflation-led-by-3-ds
[6] https://www.auspicecapital.com/alt-invest/2023/11/1/india-begins-banning-exports-of-critical-agricultural-markets
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