The global economy periodically experiences steep movements in commodity prices, causing cyclic booms and busts. These are called commodity cycles, a complex process emerging from macroeconomic shocks, supply chain bottlenecks, and policy failures.
An adage from the 1960s points out each commodity cycle lasts for about seven years. Moreover, the lower commodity prices fall during a given trough, the higher they rebound in the subsequent crest. To help understand such phenomena and their implications better, this article will trace the history of commodity cycles from the 1970s to the 2020s and beyond.
The 1970s: Setting New Record Highs
Historically, the 70s is an important decade for commodity cycles, recording all-time high prices. Gold prices reached $1,000 per ounce, while copper and nickel sold for $1 per pound and $3 per pound, respectively. Besides hard assets, food items like coffee, sugar, and beef rose by 115%, while industrial materials rose 127% in two years. Multiple factors dictated such a steep rise in commodity prices. Bad weather led to crop failure, labor problems reduced mining output, political unrest disrupted supply chains, and Arabs started over-purchasing products.
The 1970s commodity boom came on the heels of high inflation after a period of relative stability in the 1960s. In the early 70s, inflation was already pretty high in the recession-hit USA, which increasingly spread to other countries. The U.S. balance-of-payments deficits in 1971-72 overwhelmed the markets with dollar supply, followed by a shift towards flexible dollar exchange rates. Variable rates and high inflation further triggered commodity demand as a hedge against fluctuating currency prices.
The 1980s: Tackling Inflation, Tumbling Commodities
High commodity prices in the 1970s eventually led to a double-digit inflation rate in the US by 1981. Thus, Paul Volcker, the Chairman of the Federal Reserve Board, engineered two short recessions back-to-back in 1981-82 to bring down inflation.
Volcker raised the interest rates to a massive 20%, making everything costlier and reducing people’s purchasing power. As mortgage rates peaked, people had to pay almost 19% interest for houses in locations like Sudbury. But Volcker’s plan succeeded, and Consumer Price Index (CPI) came down from 14.85% in March 1980 to 2.5% in July 1983.
However, commodity prices came crashing down due to Volcker’s tight policy, and so did the U.S. economy overall. The situation deteriorated further with the 1987 Stock Market Crash, when U.S. markets fell 20% in a day. Popularly known as Black Monday, the Dow Jones Industrial Average (DJIA) fell by 508 points, sparking fears of widespread instability. The 1985 Plaza Accord and the 1987 Louvre Accord to control U.S. trade deficits contributed to the crash. As investors capitulated, program trading accelerated selling orders, creating further complications.
The 1990s: Simultaneous Growth and Market Correction
Despite the turbulent 80s, investor confidence in the productive sector remained strong as interest rates declined and the government relaxed restrictions. Commodity prices started bouncing back as output growth reached 4% in 1988.
By the early 1990s, hard assets were once again recording upward price movements. A market correction was long overdue amidst euphoric investor mood, high equity valuations, speculative trading, and overall bullish conditions. The collapse of the Thai baht in July 1997 and an emerging turmoil in Asian markets ultimately triggered the U.S. market’s fall. On October 27, the DJIA fell by 554.26 points (7.18%), the tenth largest decline since 1915. Traders initiated the selloff by reducing their equity exposure due to concerns over U.S. corporate earnings and potential economic slowdown. In 1998, there was a further market correction when the S&P 500 Index (SPX) shed 19.3% of its value.
The commodity cycle at this point was already waning at this point. Most people think of the Bre-X gold mining scandal as the primary reason for the market correction of 1997-98. But this isn’t altogether correct, although the scandal was indeed the final nail in the coffin, the commodity cycle had already stalled out by 1997 driven by bad deals as assets were selling and trading at unsustainable prices and it was only a matter of time before the market corrected.
The Early 2000s: The Dot Com Bubble Burst
Despite the market correction in the mid-90s, investments in technology stocks and internet companies skyrocketed amidst rapid technological innovation and internet adoption. Capital markets had tremendous volumes of liquidity, marked by abundant venture capital (VC) funding and speculative investing. By 1999, 39% of VC investments went to internet-based startups, with the Nasdaq index rising five-fold during 1995-2000 to a record 5048.62 points.
However, most of these companies didn’t have any proprietary technology and were far away from delivering their products. Without any fiscal responsibility, the startups spent almost 90% of their budgets on marketing and advertising. The overconfidence and excessive speculation soon ended as investors realized the folly and withdrew their funding. The Nasdaq index fell 76.81% by October 2002, wiping out nearly $5 trillion from the market.
Post-2003: The Long Commodity Supercycle
Although the internet bubble burst adversely affected the market, it couldn’t stop another commodity boom that lasted more than ten years. The 2008 Financial Crisis and the Great Recession led to a crash in commodity prices, but they rebounded by 2010. Multiple factors led to this sustained commodity supercycle at the beginning of the millennium.
On one hand, emerging and developing economies recorded strong economic growth and steady commodity demand. Although the 2008 crisis affected growth, stimulus packages helped kickstart industrial activity. According to an IMF report, the global demand for base metals crossed pre-crisis peaks by Q1 2010. However, despite the turbulence, demand in commodity markets remained intact.
On the other hand, weather-related disruptions led to supply shocks for food grains and consequent surges in commodity prices. Moreover, the mining industry couldn’t build new capacities to accommodate the burgeoning demand for metals and hydrocarbons. Slow supply responses created a disequilibrium that further pushed up commodity prices. And as these factors combined, the commodity boom was sustained for a long time.
The Post-COVID Era: A Peak Yet to Come
The COVID-19 pandemic brought the global economy to a standstill, eventually leading to a recession and collapse in commodity prices. However, commodities rebounded in 2021, some recording all-time high prices. The commodity price movement has, in fact, been the steepest in 2020-21, with prices falling to record lows and rising to record highs. A resurgence of market demand coupled with supply-chain bottlenecks has led to this commodity boom.
As Bloomberg reported, “The prices of raw materials used to make almost everything are skyrocketing, and the upward trajectory looks set to continue as the world economy roars back to life…commodities started 2021 with a bang, surging to levels not seen for years.” It is pretty evident that the current commodity cycle will be the largest yet—the cycles keep getting bigger with time. And with each cycle, hard assets always rise in value. As geopolitical tensions continue unabated, commodity prices will continue to surge, leading to a higher value of hard assets. Thus, one may rest assured that the ongoing commodity cycle hasn’t yet peaked; there’s much scope for new all-time highs to come soon.
