This article examines commodity super cycles and their relationship with gold and silver prices. Many commodities go through periods of extended boom and bust – ‘super cycles’ – where prices move well above or below their long-term trends.
Compared to short-term fluctuations, which are influenced more by microeconomic factors, super cycles differ in that they tend to span a much longer period of time. Price upswings during these periods may last 10 or even 20 years, generating 20 to over 40-year complete cycles. These super cycles occur over a broad range of commodities, as many of these are the necessary inputs for urbanisation and expansion of industrial production as an emerging economy begins to gather momentum.
Figure 1 (below) displays a base metals index consisting of aluminium, copper, lead, nickel, tin and zinc prices in real terms. To evaluate super cycles, prices are indexed to the year 1900 and are smoothed using a five-year moving average. Grey shaded areas identify periods of broad and prolonged price appreciation across these metals (or the ‘upswing’ portion of a super cycle). As shown, since the late 1800s, there have been four super cycles, driven by the resurgence of demand for raw materials during the industrialisation and urbanisation of a major economy or group of economies.
The cycle from ~1895 to ~1918 was associated with large-scale industrialisation and electrification in the US, as well as expanded demand for automobiles and increased metal demands before and during World War I. From trough to peak, the base metals index gained nearly 50%.
Following the end of the Great War, through the 1920s and into the early 1930s, the index dropped ~70%. Metal demand aggressively picked up again with rearmament prior to World War II, during the conflict and after with efforts to rebuild European infrastructure under the Marshall Plan and other investment projects. During this second major upswing in prices, the base metals index climbed three-fold.
Compared to short-term fluctuations, which are influenced more by microeconomic factors, super cycles differ in that they tend to span a much longer period of time.
The BRIC countries.
Emergence of Japan and BRIC
Following a relatively brief pause during most of the 1950s (with the index retreating ~35%), prices rebounded, driven by the emergence of Japan as its economy progressed through industrialisation to become the first developed nation in Asia. The Japanese emergence buoyed metal prices through the late 1970s and early 1980s, with the base metals index climbing ~85%. The subsequent two decades, for most of the 1980s and 1990s, were very bearish years for industrial metals, with the index declining by ~75%.
The most recent super cycle occurred in the early 2000s with the emergence of Brazil, Russia, India and predominantly China (known as the ‘BRIC’ countries). In 2000, the urbanisation rate in China (or the percentage of the total population living in urban areas) was ~35%. Over the course of the following decade, this rate approached 50%.
This mass of migration required huge quantities of industrial metals for the construction of apartment buildings, roads and other infrastructure, and the continuing buildout of the electricity grid. In less than a decade, the industrial metals index climbed by nearly 250%. The years following the curtailment of the BRIC-driven super cycle – at least this stage of the cycle – were bearish for industrial metals, with the index losing a third of its value. More recently, as world economies have opened following the COVID-19 pandemic, industrial metal prices have generally climbed, leading many to proselytise that a new super cycle has commenced. We believe that it is way too early in a cycle – if there is a cycle commencing – to draw any conclusions.
Figure 2 (below) provides additional details on the price time series of the individual metals included in the Industrial Metals Index. As shown, while there is variability, in general, the prices of these metals are shown to climb during super cycle upswings and retreat when demand during these periods subsides.
Silver and Gold Under Metals Super Cycles
Figure 3 (below) displays silver and gold price trends during the aforementioned most recent metal super cycle periods. As shown, during the cycle driven by US industrialisation and World War I, both silver and gold prices declined. This period was a continuation of a bearish trend for silver, triggered by the Law of 1873, which ended the ‘bi-metallisation’ backing of the US dollar – effectively removing silver and leaving gold as the sole monetary standard of value. In the 1920s, India, following other global currencies, also ended the backing of the rupee with silver.
During the second super cycle of the century, both silver and gold prices climbed. However, this was in response to government actions, with President Roosevelt changing the gold content of the US dollar from $20.6/ounce to $34/ounce in 1933.[2] After sinking to a low of ~$0.28/ounce (in nominal terms) in 1932, silver prices climbed after the Silver Purchase Act of 1934, which authorised the US government to purchase the metal.
It is interesting to note that silver and gold prices appear to have increasingly trended in similar patterns to those of the industrial metals, particularly since President Nixon eliminated the backing of the US dollar with gold in 1971. Closing the gold window thus removed a very large non-industrial buyer of gold. Under the gold standard system, government could be counted upon to purchase mine production en masse at set prices, regardless of industrial growth or decline in any particular moment. Silver, with its broadening industrial demand, has been ~75% correlated with the Industrial Metals Index.
The Next Metals Super Cycle (adding Supply Constraints to the Mix)
As described above, the four previous metals super cycles were demand driven. As an economy increasingly urbanises and industrialises, its demand for metals climbs sharply. Over the last 125 years, this first occurred in the US followed by the rebuilding of Europe after World War I, with the emergence of Japan and then BRIC (predominantly China) driving the most recent cycles. Our view is that the next super cycles will again be demand driven, by increasing needs in Africa and Asia. However, as opposed to previous cycles, future periods will be magnified by supply constraints. The increasing stickiness of metal supply, driven by lengthy permitting requirements and outright bans on mineral exploration and mine development, will increase the magnitudes of the metals super cycles to come.
Over the longer term, we are very bullish on industrial metals as well as silver and gold. As an example, the current population of Kinshasa in the Democratic Republic of Congo is ~17 million people. The United Nations forecasts the population to more than double to 35 million by 2050. By 2100, this city is expected to be the largest in the world, with a population of nearly 85 million. When one contemplates the necessary increase in infrastructure requiring industrial metals (most of which are already supply constrained), prices will significantly trend upward. If trends over the two most recent metals super cycles continue, the outlook seems favourable for both silver and gold prices, as well.
Over the longer term, we are very bullish on industrial metals as well as silver and gold.
[1] Real prices (in 1967 $ terms); 5-year moving averages shown to identify large trends
[2] This effectively devalued U.S. Federal Reserve Notes which were backed by gold.
