All commodities trade in cycles. Some cycles for certain commodities are faster or shorter than others and have different magnitudes in their peaks and troughs, but the general idea holds. Commodities trade in a five-phase cycle (sometimes condensed into four): 1. Demand exceeds supply: In this stage, capital investment into production is low. Accordingly, the amount coming online is also low. Due to a surge in demand from economic growth, innovation, new industrial usage(s), and/or investor speculation, demand exceeds supply and prices begin to rise from their bottom. 2. Production capex heats up: Due to a rise in demand, this incentivizes producers to invest more in production to meet this demand. Producer margins expand (or have the capacity to expand) as prices rise. Mining, exploration, and/or production activities become more profitable. This helps to boost growth and inflation in the broader economy. 3. Demand meet supply: Capacity increases and supply is put onto the market. Higher prices begin to undermine market demand. In turn, this encourages substitution (e.g., higher coal prices encouraging substitution toward natural gas). Prices begin to stabilize. 4. Production tops demand: Higher investment and capacity eventually causes supply to exceed demand, putting downward pressure on prices. 5. Capex is slashed: Once the market is flooded with supply and prices begin to trek downward, producers will cut back on their investment or even discontinue it altogether if it’s unprofitable. This reduces capacity, supply begins to drain from the market, and prices decrease further until supply gets back in equilibrium with demand. Price speculation often causes the market to temporarily overshoot this bottom (the same is true with regard to tops in stage III). The cycle then turns back to stage one and repeats. Where Commodities Are Likely to Trade over the Next 18 to 24 Months Using the above template, below is a rundown of where various commodities are likely to trade over the coming 18-24 months (from January 2018 through mid-to-late 2019): Bullish - Gold (barely, gold trades more as a currency instead of industrial-based supply/demand) - Silver (ditto) - Zinc - Lead - Alumina - Chrome Up, then Down (expected inverted U-shaped price trajectory) - Cobalt - Coal (met + thermal) Stable - Oil - Platinum - Palladium - Tin - Aluminum - Uranium - Steel - Nickel - Bauxite - Iron ore Down, then Up (expected U-shaped price trajectory) - Manganese Bearish - US natural gas - Liquefied natural gas - Copper - Lithium Conclusion Commodities are no longer the historical opportunity they were in early 2016, where just about everything listed above was at or near the down point of its cycle. This provided a good opportunity with respect to energy and materials stocks and bonds, emerging market stocks and bonds, and the commodities themselves. Commodities generally outperform late in the business cycle and are being boosted by a weak US dollar (largely due to high fiscal and current account deficits). But most commodities are about fairly priced, with a few pockets of opportunity for those who believe the reward-to-risk ratio merits taking positions.