Commodities are rarely exciting—and the price of copper, corn, or even oil doesn’t stir investors the way a tweet from Elon Musk does. Yet commodities sit at the crossroads of three of today’s biggest investment themes—rising inflation, a changing China, and the transition away from fossil fuels amid increased attention to climate change.
Barron’s highlighted this opportunity a year ago as commodities emerged from a decadelong bear market. It was a good call: The Bloomberg Commodity Index rose 27% in 2021, its best year in decades. Those three big trends are still going strong, so more gains could be ahead for some commodities, like oil, and agricultural commodities such as corn. But the price run-ups mean that investors need to pick their spots carefully. The factors affecting commodity prices—and determining which ones investors should focus on—often overlap and have different short- and long-term implications. Actively managed funds are better able to spot and take advantage of changing trends; for three good fund options, see the article on page L7.
Inflation
ILLUSTRATION BY DOUG CHAYKA
Inflation has been one of the biggest drivers of many recent economic and market trends. The most recent consumer price index, or CPI, inflation report showed that prices rose across the board in November—by quite a lot, 6.8%. And in December, the Federal Reserve acknowledged that inflation was indeed a sustainable trend—not transitory—and that it’s moving ahead with plans to raise interest rates to battle inflationary pressures. Even as the Omicron variant spreads, the world is snapping back from pandemic lockdowns. There is pent-up demand for household items, corporate endeavors, municipal projects, and, of course, for the commodities that are needed in all kinds of production. Meanwhile, many of those commodities are in short supply. Add in supply-chain problems in getting those commodities into production and the produced goods to the end user, and it’s no wonder that prices are rising.
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Investors wanting to hedge against inflation, which makes stocks more volatile, have long turned to commodities. It’s a broad “if- you-can’t-beat-’em, join-’em” strategy: If inflation is rising, the prices of commodities are typically rising, as well, so part of your portfolio will benefit even as some investment returns are muted. Energy futures have the best correlation with U.S. inflation, but over the long term, agriculture, livestock, and industrial metals are all positively correlated. Since 2000, the Bloomberg Commodity Index’s monthly year-over-year returns have had a 76% correlation with U.S. consumer-price-index data, according to J.P. Morgan. And today’s inflation is driven by structural factors that are changing the economy, business, and how we all live.
“Greenflation” is an additional factor driving inflation, and will benefit commodities needed for the green energy transition—especially copper, which is used in all things digital; lithium, used for batteries; aluminum, used to build solar panels and wind turbines; and cobalt, a catalyst for producing clean fuels. More companies and governments are setting goals to reduce or eliminate the use of fossil fuels such as coal, oil, and natural gas.
