Commodities Poised For Comeback In Investor Portfolios: 'The Future Could Be Different,' Strategist Says (UPDATED)

Editor’s Note: The headline has been revised to accurately attribute the quote “the future could be different” to BofA analyst Francisco Blanch.

The four most dangerous words in finance are: “this time it’s different,” as renowed investor Sir John Templeton once said. Yet, Bank of America believes that for commodities, the tide is now changing for the better.

For years, commodities haven’t been the go-to for investors, given lackluster returns, but Bank of America commodities strategist Francisco Blanch has some good news: commodities are back, and they are poised to reclaim their rightful place in investors’ portfolios.

With reasons such as thin inventories, ample spare capacity, sticky inflation, and significant moves towards clean energy, things are looking bright for the asset class. Blanch puts it simply: “the future could be different for commodities” after a long 15 years of not much happening.

Chart: Commodities Weakened After A Major Pandemic-Related Rally

The Changing Tide: ‘This Time Is Different’ For Commodities

With global nominal GDP growth expanding robustly and expectations of a U.S. soft landing materializing, the backdrop appears increasingly favorable for raw materials.

Blanch foresees that structural shifts in demographics and consumption patterns are anticipated to sustain inflation within the U.S. economy.

According to Bank of America, a noteworthy development is the positive roll returns commodities have generated over the past 24 months—a phenomenon not seen in 15 years.

This resurgence is attributed to the low inventories and considerable spare capacity in crude production, alongside the boost from energy transition spending on spot metals prices.

After hitting 2-year lows in February 2024, the iShares Bloomberg Roll Select Commodity Strategy ETF CMDY is on track for the strongest performing month since July 2023.

Also read: How to Start Investing in Commodities Today

“The market expects this rate cutting cycle to be different. If investors are right on the interest rate path, we believe commodity markets will tighten and commodity investors will benefit from handsome returns,” Blanch notes.

Equity and fixed income markets are signaling optimism, anticipating an improvement in economic conditions rather than a decline. This optimism, aligning with the bullish scenario for commodities, contrasts with the more cautious approach typically observed after the last rate cut in previous cycles.

“If the persistent deflationary pressures of the 2010s are indeed behind us, diversified portfolios could once again benefit from including commodities as an asset class going forward,” Blanch adds.

Gold: A Beacon of Strength

A significant indicator of the shifting sands is the surge in gold reserves by major emerging market economies, prompted by geopolitical tensions and the quest for a more diversified reserve portfolio.

This movement towards gold is reminiscent of the end of USD-gold convertibility in 1971, which heralded a new international monetary system.

Today, a similar pattern emerges as the geopolitical divide between major global powers deepens, pushing gold and potentially other commodities into a strong multi-year period of positive returns.

Despite the upward trajectory in gold prices, investor positioning remains relatively conservative compared to the peak observed in 2020.

The rationale behind the gold rally, despite a halving in SPDR Gold Trust GLD ETF positions, lies in the strategic accumulation of gold by a subset of central banks over the past five years.

This trend is not just a hedge against US dominance, but also a response to escalating geopolitical risks and a strategy to bolster national reserves among countries with previously low gold holdings.

The confiscation of Russian central bank assets has notably accelerated this race for gold, further spurred by concerns over long-term debt dynamics in Europe and the U.S.

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Image generated using artificial intelligence with Midjourney.