What's Next for Commodities and Crypto

After 42 chapters of booms, busts, manias, and crashes, Torsten Dennin does something unexpected in the Outlook and Epilogue of “From Tulips to Bitcoins.” He looks forward. And what he sees is a setup for the next big commodity cycle. The numbers he puts on the table are brutal enough to explain why.

The Carnage Before the Dawn

By 2016, commodity investors had been through a bloodbath that most people in equities and bonds never even noticed.

Let me walk through the damage. In 2015, the Bloomberg Commodity Index lost 25%. In January 2016 alone, it dropped another 7%. That brought the index to its lowest level since it was created in 1991. Since the spring of 2014, investors in commodities had lost almost half of their money.

Gold miners got hit the worst. The Arca Gold BUGS Index and the Philadelphia Gold and Silver Index fell to levels not seen since the year 2000. Back then, gold was trading at $260 an ounce. From the summer of 2011 to early 2016, investors watched 80% of their mining stock principal vanish. Eighty percent. Gone.

Gold itself fell from above $1,900 to $1,050. That is a 45% drop. The MSCI World Metals and Mining Index dropped more than 80% from its peak.

And then there was Glencore. If you read my earlier post about the Glencore IPO, you know the story. Shares went from the IPO price of 5.27 GBP all the way down to 0.67 GBP by September 2015. An 87% loss. From the IPO price, it was 90% down. The market was so panicked that Glencore’s credit default swaps went through the roof, and their bonds were yielding 17% per year. That is not a yield that says “everything is fine.” That is a yield that says “this company might not exist next year.”

February 2016: The Turning Point

Then something happened. February 2016 was the capitulation. The final puke, as traders like to call it. Everybody who was going to sell had sold. The selling was exhausted.

And the bold investors who stepped in at that moment made a killing.

Gold mining stocks tripled in six months. Glencore quadrupled. From the lows, commodities gained more than 25%.

Meanwhile, almost nobody noticed. The financial press was too busy covering the equity bull market. The Dow and S&P 500 were hitting all-time highs. European government bonds had gone negative. You were literally paying governments to hold your money. The party in stocks and bonds was so loud that the commodity recovery happened in silence.

Here is a number that tells you everything about how extreme the situation had gotten. At that point, Alphabet, the parent company of Google, was valued at roughly the same amount as all 180-plus companies in the MSCI World Metals and Mining Index combined. One tech company equaled every publicly traded mining company on the planet. That is not normal.

In 2016, commodities rose more than 15%. From the intra-year lows, the gain was over 25%. But most investors did not notice because they were watching Netflix hit new highs.

Dennin’s thesis is straightforward. He believes 2016 was the dawn of a new commodity cycle.

Looking Back to Look Forward

In the Epilogue, Dennin puts the commodity super-cycle into perspective by comparing prices at the start and at the peak.

In 2001, oil was $26 a barrel. At the peak in 2008, it hit $147. Copper went from $1,400 per ton to $10,000. Gold climbed from $255 an ounce to $1,900. Wheat went from $2.70 a bushel to $9.50. These are not small moves. These are 4x, 5x, 7x increases.

What triggered all of that? China joining the World Trade Organization in 2001. One event. One country opening up to global trade. And it set off a commodity super-cycle that lasted the better part of a decade.

Then 2008 hit. Dennin calls it the “annus horribilis” for global markets. Everything dropped 50% or more. The super-cycle was over. And for the next several years, commodities kept falling while stocks kept rising.

Real Consequences

One thing Dennin makes clear in the Epilogue is that commodity prices are not just numbers on a screen. They change the world.

High food prices helped trigger the African Arab Spring. When bread gets too expensive, people take to the streets. Low oil prices destabilized Venezuela and Brazil. When your entire government budget depends on $100 oil and the price drops to $26, your country falls apart.

The 42 stories in this book span almost 400 years. From tulip mania in 1637 to Bitcoin in the 2010s. But the pattern is always the same. Prices get too high, someone gets destroyed. Prices get too low, someone else gets destroyed. The wheel keeps turning.

The Next Wave

Dennin sees new trends forming as the 2020s approach. Battery metals. Electrification. E-mobility. Digitalization. Blockchain.

And here is the line that stuck with me. Electric vehicles might not need gasoline. But the demand for gold, copper, nickel, cobalt, lithium, and rare earths increases drastically. We covered rare earths in chapter 39. We know the problem. These materials are not optional. Every EV battery, every wind turbine, every solar panel needs them.

So the question is not whether commodities will matter in the future. The question is which commodities. The fuel economy is giving way to the battery economy. The metals change, but the cycle stays the same.

Tulips and Bitcoins

Dennin ends with a connection that gives the book its title.

“Tulips and bitcoins are linked as the two biggest financial bubbles in history, despite nearly 400 years between them.”

That is his verdict. The Dutch tulip mania of 1637 and the Bitcoin bubble of 2017. Both driven by the same human impulses. Nearly four centuries apart, and the mechanics are identical. People see something going up, they pile in, the price detaches from reality, and then it crashes.

“The wheel of time continues to turn, extreme events are doomed to repeat themselves.”

“Each market is determined in its extreme phase by greed and fear.”

These are not complicated ideas. But after reading 42 chapters of commodity disasters and windfalls, they carry weight. You see the same pattern playing out with rice in 18th century Japan, oil in 1970s OPEC, silver with the Hunt brothers, Glencore’s IPO, and Bitcoin. Different century, different commodity, same human behavior.

What Stays With Me

The Outlook and Epilogue are shorter than the main chapters, but they pull the whole book together.

Commodity speculation was not invented in this decade. It just disappeared from most people’s radar during the 1980s and 1990s, when stocks were the only thing anyone talked about. But the commodities were always there. People always needed oil, wheat, copper, gold. And the cycles always came back.

The number I keep coming back to is the Alphabet comparison. One tech company worth the same as every mining company on Earth. That is the kind of extreme that does not last. Markets always correct extremes. Sometimes it takes years. Sometimes it happens overnight. But the correction always comes.

Dennin wrote this book as the 2020s were approaching, and he saw it as a starting point. A new commodity bull market was forming. The crypto market was maturing. The world was electrifying, which meant new metals were becoming as strategic as oil used to be.

After 42 stories of speculation, corner attempts, crashes, frauds, and fortunes made and lost, the message is simple. The cycle is not over. It never is. The commodities change. The technologies change. The countries change. But greed and fear do not change. And as long as those two forces are driving markets, we will keep getting tulips and bitcoins.

Based on the Outlook and Epilogue of “From Tulips to Bitcoins” by Torsten Dennin (ISBN: 978-1-63299-227-7, River Grove Books, 2019).

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This is part of my From Tulips to Bitcoins book retelling series. New posts every week.