The Most Important Word in Commodity Investing

Editor's note: The most important factor in natural resource investing isn't timing or momentum... It's inevitability. But according to expert Rick Rule, commodity cycles don't work the way most investors expect. In this issue, he explains why investors who focus on what must happen – not on what's fashionable – are positioned for the biggest gains...

In my 50 years as a natural resource investor, I've made my share of mistakes.

But I've also made some decisions that delivered life-changing results – for me and the people who trusted me with their capital. And I can tell you that the most important concept comes down to one word that has guided my best investments...

It isn't "alpha," or "risk-adjusted returns"... or even "leverage."

It's inevitable.

Most commodities investors confuse inevitable for "imminent." They want immediate gratification. They want a narrative to be reflected in price now.

But in this business, that kind of thinking is dangerous. It will lead you to chase momentum, buy tops, and sell bottoms. But if you're patient, the inevitable has to happen. The timeline is uncertain, but the outcome is not.

That distinction has made me more money than any model or market call.

Let me explain...

The Ironclad Laws of Resource Cycles

Commodity businesses are simple in principle... but brutal in practice.

They're capital-intensive and cyclical. The market sets the price of what they sell. And when prices fall below the cost of production, pain follows. Exploration stops. And smaller producers go bankrupt.

But here's the catch: Commodity bear markets bring about their own destruction...

If prices stay low long enough, supply disappears. And if a commodity is essential, demand won't disappear... so the price must rise.

That's inevitability.

This is exactly what I saw with uranium in 2017.

At the time, prices sat around $20 a pound. But the cost to produce uranium was closer to $60. The industry was in forced liquidation. Supply was vanishing.

But reactors still needed fuel. In fact, more were being built.

So I asked myself: What's more likely to happen, the uranium price rises... or the lights turn off?

That's inevitability. And it led to $100 uranium by January 2024.

Chasing Imminence Over Inevitability Will Cost You

Most investors see the logic, but they demand immediacy.

But inevitability doesn't come with a stopwatch. Markets can remain irrational longer than most people can remain patient. That's why timing is the enemy of inevitability.

I've been early more times than I can count. In some cases, I've been six years early. That's not comfortable. But it's survivable... if you size your positions properly, demand value, and focus on balance sheets and staying power.

Here's the truth I've found: If you buy inevitability at a discount, time becomes your friend. You don't need a catalyst tomorrow. You just need the cycle to resolve.

And in commodities, it always does.

That's why I apply a basic checklist whenever I'm looking at a new opportunity...

1. Is this commodity essential to the modern world?

2. Is it priced below the industry's average cost of production? If so, supply is likely to shrink – pushing prices higher.

3. Is the industry in liquidation or distress? That's when the best assets go on sale... and I get interested.

If the answer is yes to all three, I start looking for companies with strong assets, good management, and a decent balance sheet.

This setup has delivered me – and my investors – 10-fold and 20-fold returns.

Inevitable Versus Fashionable

One word of warning: Too often, investors confuse what's fashionable with what's inevitable.

A few years ago, every conference was buzzing about battery metals and green energy. It was the beginning of the environmental, social, and governance ("ESG") wave...

People were throwing money at lithium and cobalt plays. The narrative was hot, the money was flowing, and valuations were absurd.

But just because something is fashionable doesn't mean it's investable.

The best time to buy lithium wasn't when every Tesla (TSLA) investor was obsessed with it. It was when the commodity was unprofitable to produce and no one wanted to hear about it. That's when a surge becomes inevitable.

Unlike fashionable investments, inevitability often looks boring... ugly... or politically incorrect.

That's why it's cheap. And that's why it works.

So if you're investing in natural resources, your timeline needs to outlast the headlines.

The edge doesn't come from guessing what's going to be hot next quarter. It's in patiently backing what must happen over the next several years.

For investors, inevitability is a compass. And if you learn to trust it, it can guide you to extraordinary returns... regardless of how the market is behaving today.

Regards,

Rick Rule

Editor's note: The White House just approved a $10 billion critical resource stockpile – transforming the U.S. government into one of the biggest buyers in the resource market. A legendary investor with multiple 100-fold winners says this move could spark a once-in-a-generation boom in select stocks. See which names he's targeting before the federal buying spree begins.