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Expert: War has “Supercharged” Commodities Prices

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“As we've seen in Ukraine, war has supercharged a number of these commodity prices,” John Forwood told RIU Resources Round-Up attendees.

Investment strategies for weathering and benefiting from current market trends were a hot topic at Sydney's recent RIU Resources Round-Up, held in early May.

Current opportunities and potential future ones were highlighted in the keynote address offered by John Forwood, chief investment officer at Lowell Resources Funds Management.

Quoting a February report from the head of commodity research at Goldman Sachs (NYSE: GS ), Forwood explained to attendees that we have reached a “molecule crisis” in the commodity space and are essentially “out of everything.”

This deficit has only been compounded by the war in Ukraine, which has further weakened supply fundamentals and chains.

“When the (war in) Ukraine started, about a month later the commodities index (represented by Bloomberg commodities index) had its highest one-week spike on record, and that's a record going back over 60 years,” Forwood said. “As we've seen in Ukraine, war has supercharged a number of these commodity prices.”

However, according to the CIO, there is still a considerable amount of upward growth potential.

“In terms of where we are in terms of that commodity basket, we're way behind where we were in 2008, pre the (global financial crisis) and after the mining boom of the 2000s,” he told the crowd.

“And we're way behind where the Dow Jones and equities in general have got to,” Forwood added. “So, we think that there's potential for the commodity sector to be just getting started.”

There are also several other factors that are adding tailwinds to the broad sector, according to Forwood, who cited inflation — which is at 5 percent in Australia and 7-8 percent in the US and UK — as a significant contributor.

Looking at the longer-term fundamentals that have gotten us here, Forwood pointed to lack of investment capital as a main driver.

“I think the big one, the long term one, is under investment,” he said, noting that the early 2000s mining boom led to a lot of investment, which we aren’t seeing today.

“But over the last seven or eight years, we've seen a real dearth of capital going back into the sector. And in fact, we've also seen a dearth of M&A — something that we've been looking out for and it's just not happening.”

In fact, as one of the slides Forwood presented laid out, investment from the resource industry back into itself reached a 19 year low late last year.

Despite the lack of large investment, Australia’s junior resource index was up 16 percent at the end of April compared to the broader market and the Dow Jones Index, which had slipped 9 percent.

“So that may represent a rotation from other sectors into the resources sector. And if that is the start of what's happening, that could be very, very significant for resource company prices,” he said, explaining the resource sector is actually very small on a global scale.

“And if you see significant global money flowing into that sector, you know, it's almost the sky's the limit,” Forwood added.

Gold and volatility

While speaking about several commodities, the CIO for Lowell Resource Funds Management took time to highlight how gold could also be positioned for an upward trend, because “commodities do best when inflation is rising, and interest rates are rising.”

He then displayed a chart that indicated gold was the top performer among US stocks and the US greenback during the first six months following the commencement of a Fed rate hike period.

Real interest rates, which are hovering around 0 percent, are likely to have no effect on gold's price because, according to the Forwood, rates would have to be 3 percent or higher to impact gold.

He did warn that stagflation could add more wind to the yellow metal’s sails moving forward.

“We think there's a decent chance of (stagflation) occurring, so what should you buy?” he posited. “If you think that stagflation is on its way, well, the answer is also gold.”

Forwood concluded his address by encouraging attendees to invest in the junior resource space.

“Finally, at the Lowell Fund, we like to invest in junior explorers,” he said.

“Because they're the ones who make the discoveries, and discoveries is where you can really add the most value.”

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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

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