Commodities haven’t just been outperforming… They’ve been outperforming in style.
You see, they haven’t just been outperforming the market. They’ve been doing so with less volatility.
Take a look at this chart. It compares the performance and volatility of the major market indices, and the CRB Commodities Index since the election…
For the past few years the broad market has been high-risk, high-reward. But since the election, commodities have quietly proven to be low-risk, high-reward…
In my view, this is just the beginning… And in this essay, I’ll show you which specific types of commodities you should get exposure to so you can best take advantage of this trend.
The market is only now starting to rediscover the commodities sector after a bear run that’s lasted more than a decade… Which sent commodities down almost 80% since 2008.
That’s because the election changed the market.
It added certainty that stimulus wouldn’t just mean propping up financial markets via the Fed, but increasing demand from government spending as well… Both on a large scale. This combination is fueling a demand-led recovery that’s much different than recoveries from past recessions… Which were mostly led by Fed actions, such as bailouts.
But there’s an additional component to all this…
The pandemic led to lower production in key commodities, like metals, as demand sank across the board due to lockdowns and a lag for raw materials through the supply chain.
All of this led to a deficit… Just as demand is now taking off.
But not all commodities are the same. Below is a chart the breaks down commodities into two groups: Traditional commodities (such as oil, gas, and agriculture), against an index I developed called The Alt-Commodity Index.
This index only includes commodities and sectors that’ll benefit most from the demand-driven recovery that’s in progress. The performance difference is sizable.
Metals such as platinum and rhodium (known as platinum group metals – PGM), are good examples of how new demand will continue to lift prices.
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Almost all the demand in PGMs comes from the auto industry, which grew 10.5% since 2019. But the real growth is coming from electric vehicle (EV) sales, growing at 72% since before the pandemic. And growth in hydrogen fuel cell vehicles (FCV) is right around the corner.
A lot of this new demand will be coming from China, as the country is taking initiatives to “go green”… Estimates from the Hydrogen Fuel Cell Association and Bloomberg show that this development alone will add 39% more demand to platinum.
This combination almost guarantees that alt-commodities like PGMs will continue to outperform stocks.
And it’s already happening…
Investors have been profiting from EV growth through electric carmakers Tesla and Nio in 2020… But that has grinded to a halt as they’re down 2% and 7% year-to-date (YTD)… While miners that produce PGMs are up double digits.
PGMs have industrial use, but are also considered precious metals – helping them perform the way many think gold should have…
Meaning, in an era of mass-money printing, many think of gold as a safe haven… Yet, metals like platinum are rising, while gold is falling. This is a key difference between traditional and alt-commodities.
So, what’s the best way to take advantage of this trend?
I recommend positioning into South African miners that control almost 90% of the PGM market globally. Two examples are Sibanye Stillwater (SBSW), which is up 14% YTD… And Impala Platinum (IMPUY), currently up 35% YTD.
Both are highly profitable, offer a high dividend yield, and even after their run up, still trade at very low valuations. I prefer SBSW only because it’s currently consolidating from its highs and finding support at its 50-day moving average (MA) – a good area to buy. If it falls further below that, the stock becomes a steal.
IMPUY has been flying because of its rhodium association and should be played a bit differently, depending on your investment horizon. It’s 20% away from its 50-day MA support level.
Investors with long-term perspectives should expect the price trend to continue as this new “alt-commodities” bull market plays out.
Regards,
Eric Shamilov
Contributing Editor, Market Minute
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