Supply and demand imbalances in undervalued asset classes like commodities and resource stocks offer a simple yet effective investment strategy to profit from inevitable market disruptions such as war and geopolitical uncertainty.
Lack of capital expenditure over the past 10-15 years in oil and commodity industries has led to a short-term reliance on US shale and tech investments, making commodities undervalued and bullish for the next 5-10 years when supply constraints kick in.
Subdued oil prices in the mid-$60s despite multiple theaters of war and geopolitical uncertainty are due to short-term downturns in China and lack of attention to US shale’s 20-year growth reliance.
Commodity markets operate on multi-year 7-15 year cycles rather than seasonal patterns, leading to forgetfulness and laziness in securing adequate supply and strategic reserves, resulting in supply constraints and price volatility.
Uranium and platinum markets are undervalued and bullish due to supply-demand imbalances and lack of capital expenditure over the last decade, making them attractive investments for the next 5-10 years when supply constraints intensify.
Investing in platinum can be done through physical purchases or platinum mining stocks like Impala Platinum and Sibanye Stillwater, but comes with South African risk and volatility due to supply and demand imbalances.
Platinum’s inverse correlation with South African mining platinum miners’ performance is a key bullish factor, as a shortfall in supply would drive up the price due to the consolidated supply within the three major companies.
Gold miners become incredibly profitable when gold price doubles, with asymmetric profit margins translating to their bottom line in an accelerated fashion, according to top hedge fund managers.
GDX (gold mining ETF) is at all-time low levels, with decreasing shares in issue, indicating undervalued gold miners with potential for surprising upside in duration and magnitude.
Bond yields are rising due to perceived higher risk and compensation for deflation, not inflation, as investors realize everyday expenses are higher than reported, making higher returns necessary to protect capital.
Capital invested in emerging markets, gold/precious metals, and commodity markets is each under 1%, indicating undervalued opportunities for outperformance in these sectors.
Commodities bull markets historically last many years, attracting generalist investors and momentum traders who use market stories to justify their preconceptions.
High commodity prices (e.g., gold >$3,000, silver >$35, copper >$5) boost investor confidence in producers’ margins, attracting more capital as sentiment turns into momentum.
Silver bull markets often end with an inverted V pattern, potentially reaching $50 but not maintaining that level for long.
In a commodities bull market, three new companies daily report strong earnings due to record-high metal prices.
Early M&A deals in bull markets tend to be reasonable, as buyers remember past overpriced acquisitions at cycle peaks.
🏭Mining stocks become wildly undervalued in bull markets as investors underestimate the perpetual cash flows from high metal prices.
Silver’s hybrid nature as both industrial and precious metal makes it attractive, especially when the gold-silver ratio is high.
Despite concerns, Mexico (world’s largest silver producer) has granted permits to major companies like Group Mexico, Ples, and Alamos Gold.
Royalty companies like Sandstorm enjoy immense margins due to streams and royalties contracted at much lower prices than current levels.
Dividend-paying royalty companies could attract 50 million baby boomers seeking income by raising dividend yields to around 3.5%.
The S&P 500 index has reached a new all-time high, but less than 50% of its constituent stocks are trending upward, creating a significant divergence between the cap-weighted and equal-weighted indices.
Just four companies – Microsoft, Nvidia, Meta, and Netflix – are responsible for the index’s recent surge, collectively accounting for nearly 20% of the S&P 500’s total value.
V-shaped recoveries can be particularly intense due to forced buying, as investors rush to avoid missing profits and short-sellers cover their positions.
The combination of limited participation from average stocks, overextended mega-cap leaders, and the market’s new high suggests a potential pullback in July, which could be healthy for the market to consolidate gains.
A market pullback would mirror similar patterns observed in 2020, 2019, and 1998, allowing for a period of consolidation before resuming an upward trend.
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