Unit 3 · Level 3 · Commodities & gold
Commodity cycles
A new copper mine takes roughly ten years from discovery to metal. So when prices boom, everyone invests at once, and the new supply arrives together, years later, often just as demand cools. High prices cure high prices; low prices cure low prices. The commodity cycle runs on this delay, which is why booms reliably sow the seeds of their own busts.
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What you get asked
Order the classic commodity capex cycle
The delay between decision and production is the engine of the cycle: everyone's rational response to high prices creates the next glut.
Why can't commodity supply react quickly to high prices?
You can't rush geology and construction: permits, drilling and building take years. That lag is what makes commodity prices swing so wildly.
Traders' proverb: the cure for high prices is ___ prices.
High prices trigger new supply and kill demand, which eventually brings prices down. The market carries its own medicine, on a long delay.
Oil crashed from over $100 in 2014 to under $30 by early 2016. The main driver:
Years of $100 oil financed a drilling boom; when all that shale output landed, the price collapsed. The capex cycle, live on stage.
The cycle's lesson for investors:
Peak profits attract peak investment, and peak investment breeds the bust. In commodities, euphoria is usually a lagging indicator. 🐜
The rest of this unit
Oil, gas, copper, gold: the real stuff that feeds inflation and humbles forecasters.