What causes secular bull and bear markets in commodities. What factors suggest a new commodities bull market has started and how can investors participate. What the risks are.
Topics covered include:
- What is a bull and bear market
- How long have earlier commodity bull and bear markets lasted and what were the returns
- What led to the current commodity bear market that began in 2011
- How shareholder revolts and ESG mandates have contributed to reduced investment in the commodities space, contributing to the rebound in commodity prices
- Why natural gas prices are so much higher in Europe than in the U.S.
- How the shift to electric vehicles is driving the demand for commodities
- What are five ways to participate in a commodities bull market
Show Notes
Jeff Currie on the ‘Volatility Trap’ Keeping Commodity Prices So High by Odd Lots—Bloomberg
The Energy Blame Game and Other False Narratives—Energy Income Partners
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Transcript
Welcome to Money For the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today’s episode, 384. It’s titled “Has a Commodities Bull Market Supercycle Started? If So, How Do You Invest in It?”
Exploring Commodities Investing
In the early to mid-2000s, we had a lot of discussions within our research group at the investment advisory firm Fund Evaluation Group, where I was a partner. One of those ongoing discussions was on investing in commodities.
Christian Busken, who is senior vice-president and director of real assets at FEG kept pushing back at me that we shouldn’t invest in commodity futures. I wanted to do so, but he insisted that we were better off investing in private energy investments.
Christian had only been with our firm a couple of years; now he’s been there 20 years. He’s one of the smartest analysts I know on what is going on with commodities, energy, real estate, and other real assets. At the time, Christian pointed out all of the challenges with commodity futures that we’ve discussed on this show, most recently in episode 382.
The idea of negative roll yield, and in order to make money investing in commodity futures, commodities have to rise in price more than what investors or the consensus expects because the futures price reflects what investors think the correct price of what commodities should be.
Many of our clients at the time participated directly in private energy partnerships, but our smaller clients could not. Finally, in November 2009 we added a commodity futures ETF to our discretionary portfolios. It was Invesco DB Commodity Index Tracking Fund (DBC).
At the time, in our portfolio spotlight that I would write any time we would make a portfolio change, I pointed out that we couldn’t justify adding commodities to our portfolios based on valuations, because it really wasn’t a true value of commodities, it was a function of supply and demand.
I pointed out that commodities had fallen 57% from their peak in July 2008, to the bottom on March 2nd, 2009. Then they had rebounded about 34% from their low in November 2009. But we’re still 43% below the peak level.
I pointed out the increasing demand for real assets such as oil and industrial metals by China and other developing nations, and that was underpinning commodity prices. And we felt that demand trend would continue but recognized that that demand could be met by rising supply.
We also added commodity futures as a way to protect or hedge against unexpected inflation. Which is the environment that commodity futures do the best when inflation is higher than what everyone expects. And that’s the environment we’re in today, which is why commodity futures have done so well over the past year.
We added that investment in DBC in November 2009, and I left FEG in April 2012. Over that time DBC returned 8.1% annualized, outperforming the global stock market. It worked out. But I’ve been out of commodity futures ever since.
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