First, a chart:

Source: Longview Economics

This is a chart of commodities relative to financial assets. As you can see, commodities are very cheap (and have been for a while). I’m always suspicious of arrows drawn on charts, but I agree that commodities are going higher.

They sure did on Friday, after Israel’s preemptive strikes on Iran. Oil was up $9, settling up $5. Gold was up $50. Commodities were up pretty much across the board, including soybeans and wheat. Platinum was down, but platinum is up almost 25% in a few weeks. We are starting to see signs of life in the commodity complex.

Usually when commodities are rallying, things are bad. Commodities rally when the authorities screw up, when they run too-large deficits, when they print money, when they pass onerous regulations. Commodities generally sell off when times are good. Commodities declined from 2010–2024, during the great tech bull market. Now we are seeing signs of the tech bull market coming to an end.

In each of my paid newsletters, there is a core position in a commodity index fund. Side note: Street Freak has a lot of commodity stuff in there, and that is one of the main reasons the portfolio is up 31.4% this year. It’s outperforming the S&P by 28.1%. Just sayin’…

A Bet Against Human Ingenuity

Commodities used to be difficult to invest in—you needed to be able to trade futures, but nowadays, there are a bunch of ETFs on individual commodities and indexes. You don’t get the leverage that you do with futures, but you do have exposure.

Still, even with these exchange-traded products, investing in commodities is complex and fraught with risks. A lot of people don’t understand term structure of futures and lose money on the carry—this happens all the time. For example, compare a chart of front-month WTI futures with USO, the crude oil ETF. There is no comparison. And USO almost went tango uniform when oil prices went negative in 2020. So, you have to know what you are doing, and most people don’t know what they are doing.

The one thing about commodity bull markets is that they are typically easy to trade. I have a tough time just being long stocks, unlike a lot of people—I am always coming up with reasons to sell. But commodities trend a bit stronger than stocks, so I find it easier to participate in a bull market. 

But keep in mind: A bet on commodities is a bet against human ingenuity. You are begging that all this progress we’ve made in mining and farming is going to go in reverse. Look at a chart of crop yields in corn over time. It is absolutely breathtaking. Agriculture is one thing…

Mining is a completely different story. It takes 20 years to bring a copper mine into operation. If there are supply shortages, they cannot be alleviated overnight. Everyone is focused on platinum these days, and most platinum comes from South Africa, which is not a friendly jurisdiction these days.

You saw what happened to cocoa. In these situations, it generally makes sense to buy the upper right-hand corner of the chart.

Bullish on Pretty Much Everything

I am doing my best here, but there are others that are more contemplative about commodities than I am. I actually believe that commodities bottomed in September of last year. 

One thing you have to understand about the commodity index, and the Bloomberg Commodity Index in particular, is that it is mostly oil and gold. Oil makes up about 17% of the index, and so does gold. So, if you are going to have an opinion on commodities, you must have an opinion on oil and gold. I don’t have a strong opinion on oil, though I do think it is underpricing risks in the Middle East. I do have a strong opinion on gold—I think it is going to the moon, as I wrote about a few weeks ago.

I am bullish on pretty much all metals. I am bullish on pretty much all energy. I am bullish on agriculture, though the weather is not cooperating. I am bullish on softs. I am bullish on pretty much everything. I never, ever trade commodities from the short side. Only from the long side. The results haven’t exactly been explosive so far, but they will be soon. It just takes a bit of patience.

If I had to bet which would outperform more before 2030, stocks or commodities, I would say commodities. I think commodities will be the best-performing asset class over the next 10 years. I’m sure you’ve seen these periodic tables of asset classes, where commodities have been the dog for the last 15 years, and people ask, “What is the point? Why would anyone ever invest in this stuff?” 

By the way, I’m sitting on the couch with my cat Vesper, watching a baseball game, and I just saw a commercial for Fidelity where you can invest in stocks for a dollar. The sentiment implications cannot be any clearer.

RULE 62 comes out next Tuesday—last chance to preorder an e-book here!

Jared Dillian, MFA