HardAssetsInvestor

Mike Norman: Hello everybody, and welcome to HardAssetsInvestor.com. I’m Mike Norman, your host. Well, my guest today says we are in a commodity super cycle, and it’s going to last longer and be bigger than anything that we’ve seen in the past. His name is Adrian Day, president of Adrian Day Asset Management. Also, the author of the book, “Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks.” Adrian, thank you very much for coming on the show.

Adrian Day, president, Adrian Day Asset Management (Day): Well, thank you.

Norman: So we’re in a commodity super cycle, and you say this one’s going to be longer and bigger than anything we’ve seen in the past. Why is that?

Day: Well, I’m not sure about anything in history. But it’s certainly going to be a lot longer, and a lot bigger than most cycles. And a lot bigger and longer than most people are imagining.

You know, commodities by their nature are cyclical. They’re very cyclical, as we know. And they respond to the economy generally in an exaggerated manner. But commodity cycles tend to be, in the normal course of events, longer than a normal economic cycle anyway.

So for example, for the last 250 years, the shortest copper cycle ever has been 17 years. The shortest gold cycle has been 12 years. So cycles in the commodities tend to be long.

Norman: Why is that?

Day: Well, it’s because commodities are at the early stage of production. So they take longer to respond to economic signals from the consumer. So when a consumer demand starts to pick up, the shoe retail store sees that immediately. He sells more shoes. So he orders more shoes because he ran his inventory down in a depression.

The commodity manufacturers, they’re at the early stage of production, right? They make the stuff that goes into making stuff that goes into making stuff. And so they take longer to pick up these signals. And even when they pick up the signals, they tend to take longer. There’s a delayed response before they respond. If you’ve got to put $1.2 billion into a new copper mine, you want to make sure the copper prices are really going to stay up.

Norman: So you’re saying they’re actually farther removed from the first line of demand.

Day: Absolutely. And so it takes longer to respond.

Norman: When did this cycle begin? Date it.

Day: Well basically in the year 2000. Some of the metals didn’t start …

Norman: So we’re 10 years into it.

Day: Yes. Some of them didn’t start moving until a year or two later. So copper has been nine years now. So we are only halfway through what would be the shortest cycle for the last 250 years. The reason this cycle is going to be bigger is because over the past few centuries, you typically get the biggest moving commodities when you have a new source of demand. You can obviously get spikes when you have supply disruptions and wars and things like that.

Norman: Like you had the oil embargo back in the ’70s.

Day: Exactly. But the biggest moves and the sustained moves come when you have a new source of demand. So in the British Industrial Revolution, 1825 to 1840, one of the biggest moves in commodities; 1870 to 1914, prior to the First World War, as America was industrializing, you had a big, sustained move for that 35-, 40-year period in commodities. Now we’re in the same situation, but with China. China represents 20 percent of the world’s population.

So the potential — let me emphasize potential — the potential for this one is to be so much bigger than the move that accompanied the U.S. industrialization and British industrialization. And at the same time as that increase in demand, we’re having increased constraints on finding new deposits — technological, political, environmental and economic, frankly.