Commodity Supercycle? How to Invest Without Speculating | Jonathan Wellum

Key Concepts

• Commodity Supercycle: An extended period (5-30 years) of rising commodity prices driven by long-term systemic factors.
• Debasement Trade: Investing in commodities as a hedge against currency devaluation and inflation.
• Deglobalization/Reshoring: The shift away from globalized supply chains towards regional or domestic production.
• Strategic Metals: Metals critical for national security and technological advancement (e.g., nickel, copper, platinum, silver).
• Dollar-Cost Averaging: Investing a fixed amount of money at regular intervals to mitigate volatility.
• Leveraged ETFs: Exchange-Traded Funds that amplify returns (and losses) through the use of debt.
• ESG (Environmental, Social, and Governance): Framework used to assess an investment based on sustainability and ethical impact.

Investing in the Commodity Space: A Discussion with Jonathan Wellm

This discussion with Jonathan Wellm, CEO and CIO at Rocklink, centers on navigating the current commodity market, characterized by volatility and potential for long-term growth. The core message emphasizes a disciplined, framework-driven approach to investing in this sector.

I. Market Outlook & Investment Framework

Wellm acknowledges the recent volatility in commodity markets but stresses that this is a natural consequence of significant price increases from lower levels. He draws parallels to the 1970s, noting that substantial gains are often followed by corrections. His firm advocates for building a portfolio position based on a 5-10 year outlook, recognizing a commodity cycle and a “debasement trade” (protecting purchasing power against currency devaluation) are underway.

Key Advice:

• Framework is Crucial: Define investment goals, return expectations, and time horizon before investing.
• Quality Businesses: Focus on investing in well-managed companies within the commodity space.
• Maintain Cash Reserves: "Keep a little powder dry" to capitalize on dips through dollar-cost averaging.
• Avoid Leverage: Leveraged ETFs (2x or 3x) are highly speculative and unsuitable for most retail investors, potentially leading to significant losses (60-70% in a single day, as recently observed).

II. Drivers of the Current Commodity Cycle (Potential "Supercycle")

The conversation identifies several key drivers suggesting this is more than a short-term market fluctuation:

• Deglobalization & Reshoring: The move to regionalize supply chains increases costs and demand for commodities.
• AI, Digitization & Robotics: These technologies require substantial amounts of metals and minerals. Elon Musk’s vision of widespread robotics is cited as a significant future driver of demand.
• EV & Green Revolution: The transition to electric vehicles and renewable energy sources necessitates increased mining of materials like nickel, copper, platinum, and silver.
• Chronic Underinvestment: Historically, there has been insufficient investment in commodity production, creating a supply-demand imbalance.
• Government Initiatives: The US government (and potentially others) are considering strategic stockpiles and funding to reduce reliance on China and secure domestic supply chains (e.g., a proposed $12 billion fund mentioned by President Trump).

III. The Irony of the Green Agenda & Increased Mining

Wellm highlights a seeming paradox: the pursuit of environmentally friendly technologies requires increased mining activity. He states, “a lot of times people are, you know, the green, you know, people are very concerned the green agenda and so forth and we're all concerned about environment. we want to be very careful, but it actually requires more metals and more minerals in order to uh produce all of these technologies and especially the data centers and uh I can't even imagine robotics if if Elon Musk is correct and we're all going to have a couple robots running around our house.” This underscores the need for responsible and efficient mining practices.

IV. Historical Context of Commodity Supercycles

The discussion places the current situation within a historical context, referencing past commodity supercycles:

• 1890-1920s: Driven by industrialization.
• Post-World War II: Fueled by rebuilding nations.
• 2000-2010: Driven by China’s urbanization and entry into the World Trade Organization.

These cycles demonstrate that prolonged periods of rising commodity prices are not uncommon.

V. Investment Options & Strategies

Wellm outlines various investment avenues, emphasizing diversification and a focus on quality businesses:

• Real Estate: Specifically, data centers (Digital Realty, Prologis) benefiting from the demand for digital infrastructure.
• Construction & Infrastructure: Companies involved in building and upgrading infrastructure to support increased energy demand (Snyder Electric, Brookfield Infrastructure, Carlile Group, Johnson Controls Verta).
• Energy: Advocates for continued investment in fossil fuels alongside renewables, citing their ongoing importance.
• Strategic Metals: Focus on silver (due to its monetary and industrial applications) and other critical metals.
• Semiconductors: Recognizes the importance of semiconductors (Nvidia, Taiwan Semiconductor) but cautions against overpaying due to current valuations.
• Efficiency-Driven Businesses: Companies that can leverage AI to improve productivity and margins (Amazon, Intuitive Surgical, ServiceNow).
• Commodity ETFs: Suggests using diversified commodity ETFs (e.g., SPAT ETF for silver miners) as a way to gain exposure to the sector while mitigating risk.

Important Considerations:

• Mining Companies: Mining is a complex and risky business. Diversification within the mining sector is crucial.
• Valuation: Avoid overpaying for assets, even in a bullish market.
• Substitution: Be aware that rising prices can incentivize the development of substitute materials.

VI. Government Role & Regulation

Wellm believes the government’s primary role should be to remove barriers to commodity production:

• Deregulation: Streamline permitting processes.
• Tax Credits: Incentivize capital investment.
• ESG Balance: Avoid overly burdensome ESG regulations that hinder development.
• Strategic Stockpiles: Government initiatives to build strategic reserves are a positive sign.

He emphasizes the need to reduce dependence on adversarial nations and reshore critical industries.

VII. Market Ratios & Valuation

Wellm points to the ratio of the S&P 500 to the commodity index (currently around 25-26, historically 12-14) as an indicator that commodities are undervalued relative to the broader market. He argues that commodities are essential to fueling the technology revolution and their prices need to rise to justify capital investment. “If you look at the um S&P 500 and divide that by the commodity index, okay, um that currently is trading at a ratio of about 25 26. So the S&P 500 divided by the prices of these basket of commodities. Why is that important? Because typically that trades maybe 12, 13, 14 times, it's been as low as six. But what it means is that the S&P which is driven by all these digital companies uh you know and the tech companies and magnificent seven so so on and so forth um they are really highly valued. What's not highly valued is the commodities but we need the commodities to drive the technology.”

Conclusion

The discussion concludes with a call for disciplined, diversified, and value-oriented investing in the commodity space. While acknowledging the potential for significant gains, Wellm stresses the importance of risk management, avoiding leverage, and maintaining a long-term perspective. The overarching theme is that the confluence of factors driving the current commodity cycle presents a compelling investment opportunity, but requires a thoughtful and strategic approach.