Commodities are having a moment, and headlines will tell you why: the impact of the wars in Iran and Ukraine-Russia on energy markets, the AI boom’s reliance on a wide range of rare earth minerals, and long-term inflation and sovereign debt concerns bolstering precious metals.
The Bloomberg Commodity Index has returned nearly 32% year to date, and some investors are taking notice.
“Hot money attracts assets,” said Mark Hackett, chief market strategist of Nationwide Investment Management, noting that commodities’ recent strength may be coming at the expense of the bond market.
“I personally think a lot of this sell-off that we’ve seen in bonds in the last couple of weeks is people throwing in the towel on bonds,” Hackett said. He expects to hear this exact logic parroted on TikTok and X as a reason to buy commodities, though he cautioned it’s not “wise.”
That’s not to say he isn’t bullish on commodities for the longer term. He wrote an article in September making the case for commodity exposure in portfolios, citing their relative lack of correlation with equity markets. They can be a way to play long-term trends while protecting against market downturns in a way that bonds don’t seem to do anymore, he said.
While Hackett sees value in commodities investments, he cautioned against making short-term trades. As any commodities trader will tell you, history is littered with firms that fell apart from a failed commodity bet.
“There’s a large graveyard of people who thought they were smart enough to bet on specific moves in energy prices,” Hackett said. Here’s how he suggests investors approach the asset class.
Invest, don’t trade
Don’t try to time the market, because “commodities don’t always act the way you think they should,” Hackett said.
“If you try and pick the top and the bottom of commodities, you’re asking for trouble,” Hackett said, noting that the wide range of traders and investors betting on it means that you are “running against a fickle crowd.”
Look no further than the chaos in oil markets since the US began its war in Iran this February. Investors buying large amounts of oil in March, expecting long-term disruption to oil prices due to the blockade of the Strait, would have had quite a rough summer as prices fell back from their initial surge.
It may be a fool’s errand to try to bet on what happens over the next three to six months in commodities, but there are clear long-term trends pushing prices up.
In developed countries, the AI boom is dramatically increasing the demand for power and minerals such as copper. In developing countries, rising living standards require more commodities. Increased meat consumption globally is a long-term driver of corn and wheat prices, which are used to feed livestock. Farmers need 10 calories of grain to produce a calorie of beef.
There’s also a portfolio-construction reason: bonds have been moving in the same direction as equities since 2022, and investors are looking for alternatives to their equity holdings.
“This is the period where you would want bonds to act as a ballast,” Hackett said. Instead, they’re acting like equities with worse returns.
But that doesn’t mean you should sell all of your bonds to load up on commodities right now, especially while bonds are cheap and commodities are expensive, Hackett said.
“It’s a great time to own commodities,” Hackett said, but “god bless” if you try to time it.
Invest in commodities companies, not futures
Instead of playing against hedge funds and traders in the actual commodities markets, Hackett said he “prefers” to invest in the companies exposed to the asset class.
For example, instead of oil, you’d buy the refiners and producers, a group that includes names like Exxon and Chevron, as well as maintenance providers and others in the supply chain. It can be a more stable investment than the futures markets, with valuation based on quarterly revenue rather than daily spot prices, while index-investor money helps smooth volatility.
These companies also provide interesting angles on the commodity trends. Companies that actually refine oil, as well as those that provide maintenance services for refineries, are seeing record refinery cracks amid the Ukraine-Russia and Iran war. Gold miners are also huge copper producers, a boon in the AI age, because it’s their “backup” mineral when a dig doesn’t surface gold, Hackett said.
Some commodity producers, especially energy companies, also offer dividends. Chevron’s annual dividend of roughly 3.5% actually puts it close to the yield on a short-term Treasury bond, which can range from 4% to 4.8%.
And even though you may hold many of these companies in your portfolio already, it’s probably a pretty small slice. The Dow Jones removed most energy stocks from its index, Hackett said, and it’s now less than 4% of the S&P 500.
“These companies were left for dead,” Hackett said, but now, they’re ascendant. While the best time to buy them might have been when they were left for dead — “If I’m willing to market time, it’s because the company is down 35%, not up 30%.”
