Venture: Commodities

Issue 124;

The fastest-rising trend is in semiconductors, which are expensive, volatile, and overbought. For calmer, younger and cheaper trends, the best place to look is in commodities, which have a catalyst. The war in Iran is driving inflation higher, and a key beneficiary is commodities.

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Precious metals have done most of the work in recent years, but that is now spreading to energy, agriculture, and industrial metals. Not only are commodities starting to outperform, but they also have low correlation with equities, making them a powerful diversifier. Moreover, investors’ allocations are still not high enough.

Equities vs Commodities since 1996

Source: Bloomberg

Some years ago, I created this somewhat hectic chart showing the major commodities compared to gold. When high, they are cheaper than gold, and when low, they are pricier than gold. Natural gas (light blue) is the cheapest of all, but it is hard to invest in, due to a punitive roll yield. For example, spot natural gas is up 48% over 10 years, but the ETP that tracks it is down 92% over the period. Don’t blame the ETP; it is just how gas futures work, with a massive negative roll yield, driven by high storage costs and a low above-ground supply.

Commodities vs Gold

Source: Bloomberg

The next cheapest group, still in blue, is agriculture, and that is what I will discuss today.

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