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What’s Been Driving Commodities?


Head of iShares Investment Strategy Americas at BlackRock

Investors turn to commodities amid rising inflation concerns.

Key takeaways

  • Commodity indexes are rallying as government stimulus and low interest rates fuel inflation expectations.
  • Commodities can help investors hedge against inflation and diversify portfolios.
  • Commodity exchange traded products (ETPs) offer convenient and affordable access to broad baskets of commodities.

Expectations for rising inflation in a strengthening, post-COVID economy have helped lift commodity prices in 2021, and recent moves highlight how commodities can offer diversification as markets price in potential risks of stimulus-fueled growth.

Commodities, as represented by the S&P GSCI – a benchmark of 24 commodities in agriculture, energy and metals — is the top-performing asset class through the middle of March, up 15% through March 26, outpacing all other asset classes.1 It’s a sharp turnabout from 2020, when commodities lagged behind stocks and bonds.

Commodities and inflationary forces

Commodity price gains in part appear to reflect the growing demand for raw materials such as copper for use on the factory floor and to build renewable energy infrastructure, and we expect that trend to continue.2 This follows severe pandemic-related disruptions in the global supply chain which accelerated a shift to localized production, limiting supply and pressuring raw material exports.  With inventories remaining tight and commodity capacity constrained, copper, aluminum, palladium, corn all recently traded at multi-year highs, and oil prices have recovered to pre-COVID levels.3

Extraordinary fiscal action from policymakers will aid the economic recovery in the near term but is raising questions about the potential for longer-term inflationary pressure. The discretionary fiscal response so far from global policy makers in response to the pandemic is about four times larger than after the global financial crisis, according to the BlackRock Investment Institute.

Rising commodities indexes may be a reflection of increased inflation expectations

Rising commodities indexes may be a reflection of increased inflation expectations

Bloomberg, as of 3/26/2021. Index performance is for illustrative purposes only. The green line represents the S&P GSCI Total Return Index, an index composed of a diversified group of commodities futures including energy, industrial and precious metals, agricultural, and livestock. The US 10-year breakeven rate measures the difference between the 10-year Treasury Bond and Treasury Inflation Protected Securities (TIPS). The breakeven rate serves as an indication of the markets’ inflation expectations over the 10-year horizon. Index performance does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

Consider exposures to baskets of commodities to help hedge against inflation

Previously, investors thought of gold when looking to protect against price surges because gold has historically demonstrated moderate sensitivity to changes in inflation. Recently, the relationship between gold prices and inflation has been less pronounced than in cyclical commodities such as energy, which is more directly tied to consumer and manufacturing activity. Gold has tended to underperform in periods of rising real interest rates because owning physical gold doesn’t generate income in the form of interest or coupons.

We believe investing in exposures to baskets of commodities can help to hedge against inflation, since they are inputs in inflation gauges including the consumer price index. For example, energy comprised about 6%4 of inflation as measured by the Consumer Price Index for All Urban Consumers and impacts the costs of many goods and services in the economy. Historically, commodities have exhibited relatively low correlation to equities and bonds over time, adding diversification to multi-asset portfolios.5 Moreover, commodities sectors typically have a low correlation or negative correlation to each other, for instance precious metals and livestock are two commodities sectors that are historically negatively correlated.

ETPs for access to commodity indexes

Investors are increasingly using commodities in their portfolios for diversification of returns and to help mitigate other risks in their portfolios. Demand for broad, diversified commodities ETPs that give investors access to commodity exposures across energy, metals, agriculture and livestock sectors vs. single commodity exposures such as gold or oil, has jumped in 2021, bringing in $6.7 billion globally.6

Global Commodity ETP AUM (US$ BN)

Global Commodity ETP AUM (US$ BN)

Source: BlackRock, as of 3/24/2021. Data includes global commodity ETP AUM across broad and single commodity ETPs. Subject to change.

ETPs offer convenient, affordable access to broad commodities investment strategies and can help investors align their portfolios with their views on inflation and economic growth.

1Bloomberg (as of March 26, 2021).
2Demand from renewable power generation, battery storage, electric vehicles, charging stations and related grid infrastructure accounts for about a fifth of copper consumption, according to Citigroup Global Markets Inc.
3Bloomberg (as of March 26, 2021).
4U.S. Bureau of Labor Statistics (as of February 2021).
5BlackRock analysis of Bloomberg data (as of March 26, 2021); the S&P GSCI Index’s correlation with the S&P 500 is 0.39 over the past 20 years, and -0.09 with the Bloomberg Barclays US Aggregate Bond Index. Correlation of 1 means uniform price moves, while -1 means perfect opposition. Zero correlation means no relationship.
6BlackRock (as of March 24, 2021).

Originally Posted on April 5, 2021 – What’s Been Driving Commodities?

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