Natural resources like energy, metals and agriculture “look set for an extended run, and investors should get on board,” says a recent article in Barron’s.
The article reports that, according to Goldman analysts, the recovery in commodity prices “will actually be the beginning of a much longer structural bull market” reminiscent of the 1970s, when gold prices surged, and the 2000s when oil rose to over $140 a barrel.
As global pandemic restrictions ease, economies are poised to revive in the second half of 2021, the article notes, adding that “monetary conditions have rarely been so easy. The Federal Reserve may keep short interest rates near zero through 2023, while tolerating 2%-plus inflation.”
The Goldman analysts see a “structural underinvestment” in commodities, especially energy, after a decade of poor returns. The article cites returns of the “energy-heavy” S&P GSCI commodity index that, although it has rallied 66% from its April bottom, saw negative 60% returns over the past ten years (versus a 263% return for the S&P 500).
Large university endowments typically include some commodities investments as a way to diversify and hedge equity and bond exposure, the article notes, adding that “individual investors may now want to do the same and increase their commodity exposure to 10% or more of their portfolios.” It adds that while commodities may not be top of mind for environmentally focused investors, even in a green economy they are seeing an increase in demand.
A few other takeaways from the article:
- Copper: “There is no good substitute for copper wiring,” for conducting electricity. Electric cars require four times as much copper as vehicles with internal combustion engines and onshore wind farms are four times as copper intensive as traditional power plants.
- Energy: While a renewed emphasis on renewable energy from President Biden may soften demand for oil and gas, restrictions on drilling and pipeline construction could tighten supply.
- Gold and Silver: Increased consolidation has left the gold industry healthy and profitable. Silver is also getting a boost due to electronic and solar panel applications.
- Agriculture: “Weather and international demand drive U.S. grain prices, and both have been favorable in recent months.”
The article concludes, “With inflation stirring and the Fed more dovish than it has been in more than 40 years, the outlook for commodities is favorable. Indeed, there’s a good chance that this decade could resemble the inflationary 1970s, when commodities made historic moves.”