Commodity asset class drivers over the last ten years

There has been a lot of talk about the super-cycle in commodities but it is important to breakdown the source of the gains in prices. Commodities have been range-bound for the last few years when you look at an index but there is a lot more going on when you break-up the performance by sectors.

The big rally in commodities has really been driven by the precious metals markets. They were a dominant driver pre-Great Recession but were certainly the key driver in the post-Recession, new QE period. This return increase was driven by flows into ETF's and other financial products that made gold more accessible to retail customers than before. That movement into gold and a lesser extent silver has stalled but the rise of gold relative to other commodities is still a important story in the commodity markets.

The gold story is an anti-inflation story. It is a story against weak currencies and a story against excessive debt, and it is a story that has played out at this time. We have not had the large crisis in the EU which some expected. Inflation has been under control at this time and financial assets have done well. The gold move is not about supply shortages but demand driven by substitution from other assets.

The second large commodity theme has been the strong move in the base metals which is driven by the demand from China and its infrastructure and real estate development. There has been an investment lead rally in China which created strong demand for copper, iron, lead, zinc, and other base metals. With the slowdown in China and the shift to consumerism, prices have been on the way down. Investment in mining from a few years ago has led to new supply so there is a natural mean reversion in this sector. 

The energy sector has seen increases in oil prices related to geopolitical risk and demand from emerging markets, but that has cooled with a reduction in tensions and slower global growth. The great increases in natural gas has created a new market structure in the US.

Agriculture markets have had similar returns as the index but with more volatility given supply shocks. Agriculture markets see more mean reversion and offer more trading opportunities given seasonal factors.  This may be the place of greatest potential opportunties in the short-run.