Disclaimer: The information presented in this article is for informational purposes only and should not be considered financial advice. Readers are advised to conduct their own research and consult with a professional before making any investment decisions.

By Doug Young – 23 September 2024

the rise of commodities

Introduction

The investment landscape is undergoing a significant shift as analysts discuss the possibility of commodities replacing bonds in portfolio diversification strategies.

In a recent analyst note from a Bank of America strategy team including Jared Woodard and Michael Hartnett, the suggestion that commodities could be a better investment than bonds in the 2020s has raised eyebrows and sparked a debate among investors.

Bonds vs. Commodities: A Changing Perspective

Traditionally, bonds have played a crucial role in the renowned 60/40 investment model. However, analysts are reevaluating this approach as commodities emerge as a potential alternative.

Bonds have struggled to provide the necessary diversification benefits they are known for, given the persistently higher inflation and interest rates that have marked the years since the global health crisis.

Commodities, on the other hand, have proven to be an effective hedge against inflation.

Commodities: An Effective Hedge Against Inflation

The Consumer Price Index, the nation’s prominent inflation gauge, reveals that commodities make up nearly 36% of its composition.

Bank of America analysts assert that the commodity bull market in the 2020s is just getting started, emphasizing its potential as a better investment option.

The changing economic environment, characterized by debt, deficits, demographics, reverse globalization, AI, and Net Zero policies, further supports the inflationary outlook for commodities.

Performance Comparison: Commodities vs. Bonds

When comparing the returns of commodities and 30-year US Treasuries, the contrast is stark.

Over the past four years, 30-year US Treasuries have declined by roughly 40%, while commodities have provided an average return between 10% and 14% since the beginning of the decade.

In 2022, both equities and bonds experienced meaningfully negative returns, with the benchmarked 10-year US Treasury note posting its worst calendar year performance since 1788. In contrast, the Invesco DB commodity tracking ETF, a portfolio of 13 commodities, returned close to 20%.

Geopolitical Risk and Commodities

Geopolitical risk has the potential to have an inflationary impact on economies, triggering supply chain disruptions and tensions. During such periods, select commodities, including precious metals, can act as a safe haven.

UBS analysts have expressed their view that commodities like oil and gold remain potentially helpful geopolitical hedges, providing a measure of stability in uncertain times.

The Growing Favour for Gold and Commodities

Gold has emerged as a preferred safe haven asset class, surpassing treasuries in terms of performance over the last several years.

The movement into gold has been observed across various sectors, starting with central banks and followed by big fund managers, hedge funds, and pension funds.

Financial institutions are now considering the inclusion of commodities in their standard portfolio mix, recognizing the growing significance of this asset class.

Conclusion: A Potential Financial Shift

The rise of commodities as a potential game-changer for portfolio diversification signifies a significant shift in the financial landscape.

The challenging environment for bonds, coupled with the inflationary outlook and geopolitical risks, has fueled the growing interest in commodities.

While the inclusion of commodities in the standard portfolio mix is yet to be seen, the movement into gold and other commodities continues to gain momentum, potentially reshaping investment strategies in the years to come.

Disclaimer: The information presented in this article is for informational purposes only and should not be considered financial advice. Readers are advised to conduct their own research and consult with a professional before making any investment decisions.

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