When investors think about commodities, they often recall the 1970s, the last time commodities were in vogue in the investor’s playbook. Over the last 40 years, with falling interest rates and a focus on bonds and stocks, commodities have largely been ignored as an investment class.
Decline of Commodities
As prices for commodities dropped, many believed they were no longer a worthwhile investment. This decline was attributed to the “peace dividend” after the fall of the Soviet Union and the rise of globalization. The soviet union also increased the supply of oil and other commodities in the open market to raise cash quickly – pushing prices even lower.
Changing Landscape
But that was then. Today, we face a different world—one that’s hotter both geopolitically and environmentally. With supply chain threats, nearshoring, and rising labor power, commodities may once again become appealing to investors. Portfolios looking for capital growth and protection against volatility might benefit from a commodities allocation.
Supply and Demand Dynamics
From a basic supply and demand perspective, investors might see an opportunity. Demand is rising with electrification, renewable energy, and the growing needs of AI and data centers. Meanwhile, supply is limited by environmental regulations and ESG mandates, which could lead to higher prices.
The following charts help explain why commodities might return to higher values over time.
Overdue Mean Reversion
30-Year Chart of the Broad Commodity Index (How many broad investment indices have stayed down for over 30 years?!)
Gold Hits New Highs – A Sign of Big Changes in the Commodity Sector?
Rising Prices from Strong Demand and Climate Impact
Many commodities are in markets where demand stays strong, no matter the price, possibly causing prices to keep rising. Climate change hits tree-based crops like cocoa and orange juice harder because they can take years to recover from weather events, unlike row crops like corn and wheat, which can bounce back in the next season.
Global Copper Demand Is Surging
- Radical shifts in the energy system are happening. According to Goldman Sachs, China plans to install around 150 gigawatts (gw) of copper-intensive solar-energy this year, nearly double last year’s amount.
- Pumped-storage hydropower, which stores energy from wind and solar, is another example. China already has 30% of the world’s hydropower-storage capacity, at 50gw, and is building 89 more gigawatts, requiring a huge amount of copper.
- Other countries are also investing heavily in green energy, boosting copper demand. S&P Global predicts copper demand will nearly double by 2035, driven by batteries, energy transmission, solar cells, and electric vehicles, which need twice as much copper as traditional cars.
- This demand reflects the push for cleaner energy and reduced reliance on imports.
Source: Goldman Sachs, October 2023
The Expected Demand Increase
*For Illustrative Purposes Only
Commodities and real assets are becoming important again. Savvy investors should watch these trends closely and adjust their strategies accordingly.
Have You Registered for the Annual Conference?
About the Author
ALINE Wealth is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC. This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors. All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. ALINE Wealth and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. ALINE Wealth and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice. This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.