Commodities Supercycle: How to Ride the Wave

The Commodities Supercycle is Here to Stay

Investors should be aware that small shifts in commodity allocations can have a massive impact on prices. Commodity markets are relatively small compared to stocks and bonds, with energy and materials combined accounting for only about 6% of the S&P 500 index.

The Iran conflict is a case in point, where oil prices spiked by 64% in March as energy supply was squeezed, but gold fell by 12%, largely because it had become inflated due to heavy speculative buying and was one of the few liquid assets investors could sell to meet margin calls.

Investors should consider owning commodities or commodity-related equities. While physical commodities primarily respond to current and near-term supply-demand imbalances, commodity-related equities are impacted by factors such as hedging policy, capital allocation decisions, project pipelines, position in the commodity value chain, location, and geological issues.

The return profile of commodities also features positive convexity, meaning price upside is often much larger than downside. This is rooted in commodities' physical nature and direct links to productive activities that are necessary to keep economies humming.