A historical analysis of commodity cycles from the 1970s to the 2020s
The global economy periodically experiences sudden movements in commodity prices, causing cyclical booms and busts. These are known as commodity cycles, a complex process resulting from macroeconomic shocks, supply chain bottlenecks and policy failures.
A saying from the 1960s states that each commodity cycle lasts about seven years. Moreover, the more commodity prices fall during a given low, the more they rebound during the next peak. To help better understand these phenomena and their implications, this article will trace the history of commodity cycles from the 1970s to the 2020s and beyond.
The 1970s: setting new records
Historically, the 1970s is an important decade for commodity cycles, recording unprecedented prices. The price of gold reached $1,000 per ounce, while copper and nickel were selling for $1 per pound and $3 per pound respectively. In addition to durable assets, food products like coffee, sugar and beef are up 115%, while industrial materials are up 127% in two years. Multiple factors have dictated such a rise in commodity prices. Bad weather led to poor harvests, labor problems reduced mining production, political unrest disrupted supply chains, and Arabs began buying too much produce.
The commodity boom of the 1970s followed high inflation after a period of relative stability in the 1960s. By the early 1970s, inflation was already quite high in the recession-hit United States, which increasingly spread to other countries. US balance of payments deficits in 1971-72 overwhelmed dollar supply markets, followed by a move toward flexible dollar exchange rates. Floating rates and high inflation further triggered the demand for commodities as a hedge against currency price swings.
The 1980s: Fighting inflation, crashing commodities
High commodity prices in the 1970s eventually led to double-digit inflation in the United States in 1981. Thus, Paul Volcker, the chairman of the Federal Reserve, staged two consecutive short recessions in 1981- 82 to lower inflation.
Volcker raised interest rates to 20%, making everything more expensive and reducing people’s purchasing power. When mortgage rates peaked, people had to pay nearly 19% interest for homes in places like Sudbury. But Volcker’s plan succeeded, and the consumer price index (CPI) fell from 14.85% in March 1980 to 2.5% in July 1983.
However, commodity prices crashed due to Volcker’s restrictive policies, as did the US economy as a whole. The situation deteriorated further with the stock market crash of 1987, when US markets fell 20% in one day. Popularly known as Black Monday, the Dow Jones Industrial Average (DJIA) fell 508 points, raising fears of widespread instability. The 1985 Plaza Accord and the 1987 Louvre Accord to control US trade deficits contributed to the crash. When investors capitulated, the trading program accelerated sell orders, creating further complications.
The 1990s: simultaneous growth and market correction
Despite the turbulence of the 1980s, investor confidence in the productive sector remained strong as interest rates fell and the government eased restrictions. Commodity prices began to rebound when output growth reached 4% in 1988.
In the early 1990s, durable assets were once again recording upward price movements. A market correction was long overdue amid euphoric investor sentiment, high stock valuations, speculative trading and generally bullish conditions. The collapse of the Thai baht in July 1997 and the onset of turbulence in Asian markets finally triggered the fall of the US market. On October 27, the DJIA fell 554.26 points (7.18%), the tenth steepest drop since 1915. Traders initiated the sell-off by reducing their exposure to equities due to concerns over US corporate earnings and the potential economic downturn. In 1998, there was another market correction when the S&P 500 (SPX) index lost 19.3% of its value.
The commodity cycle at this point was already in decline at this point. Most people believe that the Bre-X gold mine scandal is the main reason for the market correction of 1997-98. But that’s not quite right, even if the scandal was indeed the final nail in the coffin, the commodity cycle had already come to a halt in 1997, driven by bad trades, as assets sold off and were trading at unsustainable prices and it was only a matter of time. before the market corrects itself.
The early 2000s: the bursting of the Internet bubble
Despite the market correction in the mid-1990s, investments in technology stocks and Internet companies soared amid rapid technological innovation and Internet adoption. Capital markets had huge volumes of liquidity, marked by abundant venture capital (VC) funding and speculative investments. In 1999, 39% of venture capital investments went to internet-based startups, with the Nasdaq index quintupling between 1995 and 2000 to a record high of 5048.62 points.
However, most of these companies lacked any proprietary technology and were far from delivering their products. Without any fiscal responsibility, startups spent almost 90% of their budgets on marketing and advertising. The overconfidence and excessive speculation quickly ended when investors realized the madness and withdrew their funding. The Nasdaq index fell 76.81% in October 2002, wiping out nearly $5 trillion from the market.
After 2003: the long commodity supercycle
Although the bursting of the dot-com bubble hurt the market, it could not stop another commodity boom that lasted more than a decade. The 2008 financial crisis and the Great Recession caused commodity prices to crash, but they rebounded in 2010. Multiple factors led to this sustained commodity supercycle at the turn of the millennium.
On the one hand, emerging and developing economies have experienced strong economic growth and stable demand for commodities. Although the 2008 crisis affected growth, the stimulus plans helped revive industrial activity. According to an IMF report, global demand for base metals surpassed pre-crisis peaks in the first quarter of 2010. However, despite the turmoil, demand in commodity markets remained intact.
On the other hand, weather-related disruptions have led to food grain supply shocks and consequently commodity price spikes. Additionally, the mining industry has been unable to build new capacity to meet the growing demand for metals and hydrocarbons. Slow supply responses created an imbalance that further pushed commodity prices higher. And as these factors combined, the commodity boom continued for a long time.
The post-COVID era: a peak yet to come
The COVID-19 pandemic crippled the global economy, eventually leading to a recession and a collapse in commodity prices. However, commodities have rebounded in 2021, with some seeing record prices. Commodity price movement has, in fact, been most pronounced in 2020-21, with prices falling to record lows and reaching all-time highs. A resurgence in market demand coupled with bottlenecks in the supply chain has led to this commodity boom.
As Bloomberg reported, “Prices of commodities used to make almost everything are soaring, and the upward trajectory looks set to continue as the global economy comes back to life…commodities started 2021 with a bang, reaching levels not seen in years.” It’s pretty obvious that the current commodity cycle will be the biggest yet – cycles just keep getting bigger over time. And with every cycle, sustainable assets go up still in value.As geopolitical tensions continue unabated, commodity prices will continue to soar, driving up the value of durable assets.Thus, one can be assured that the ongoing commodity cycle n hasn’t peaked yet; there’s plenty of room for new all-time highs to come soon.