The commodity supercycle: myth or reality? Part 3

Another proponent of the bullish case for commodities is Frank Holmes, chief investment officer of San Antonio, Tx., based US Global Investors (GROW-Q), who projects commodity demand based on an infrastructure boom driven by globalization, urbanization and wealth creation. In a presentation entitled “The infrastructure boom and its impact on commodities like gold,” Holmes says that the world is in the midst of a megatrend in infrastructure build-out, which will require massive amounts of commodities. This is not limited to emerging economies: the U.S. requires an infrastructure investment of US$1.6 trillion. Even this amount is dwarfed by the worldwide (including U.S.) infrastructure spending over the years 2005 to 2030, which Holmes projects to reach a mind-boggling $41 trillion. Imagine what this could do to commodity demand. (As a comparison, $41 trillion is about three times the size of the U.S. gross domestic product.)

Population growth coupled with rising affluence and urbanization creates demand for all kinds of goods, in turn raising demand for commodities. Living standards in emerging economies still have a long way to catch up, with gross domestic product (GDP) per capita of US$5,000 compared to US$40,000 in developed countries. Holmes projects that emerging economies will experience rising consumption levels per capita for oil, steel and electricity. Being creditor nations, these developing countries have substantial financial reserves, so they are in a strong position to invest in development. This is also true at the corporate level. Corporate balance sheets in emerging economies are strong, carrying less debt than their counterparts in the developed G7 countries.

As an example of commodity demand this infrastructure boom implies, Holmes projects that the amount of copper which will be consumed during the 25 years from 2007 to 2032 will equal the entire amount of copper consumed throughout history until 2007. Contrast this strong demand with the lagging supply-side response, and the conclusion is that fundamentals are bullish for the red metal. Turning his attention to gold and oil, Holmes says that all the fundamentals are pointing to continued strength in both commodities.