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West Texas Intermediate crude oil — a global oil benchmark — climbed 30% since the beginning of the year before falling slightly last week, and as of Monday is around $60.40 per barrel. Meanwhile, the price of copper rose above $4 per pound this month for the first time in nearly a decade.
Analysts at JPMorgan recently wrote the last supercycle bottomed in 2020 and that we’ve likely entered the upswing phase of another. Goldman Sachs analysts said late last year that we could be seeing similar forces at work now as those that drove commodities to surge in the 2000s.
So what exactly is a supercycle? And how should you position your portfolio to ride it out?
What is a commodities supercycle?
A commodities supercycle is a boom in the demand for commodities, causing rising prices as suppliers struggle to keep up with demand.
The last one happened in the mid-2000s and was led by China's surge in demand for industrial commodities.
Is a commodities supercycle coming?
It depends on whom you ask. The analysts at JPMorgan said the drivers of this supercycle include post-pandemic economic recovery, ultra-loose fiscal and monetary policies and the end of the trade war between the U.S. and China. Goldman Sachs analysts said the drivers include a focus on environmental policies — like Biden’s climate plan and the European Union vowing to cut carbon emissions — that would boost the price of commodities like energy.
But not everyone is convinced. A lot of what we’re seeing now in commodities is the "reflation trade," analyst speak for a regular jump in economic growth and inflation after a recession, as the economy recovers, says Don Calcagni, CIO of Mercer Advisors based in State College, Pennsylvania. Analysts at UBS wrote in a note last week that while they don’t see this as the beginning of a new commodity supercycle, they do think the recent commodity rally has further to run. Meanwhile, Vivek Dhar, a mining and energy economist at the Commonwealth Bank of Australia said on CNBC’s “Squawk Box Asia,” said whether the surge in commodities will continue depends on China’s policies.
While there may not be a supercycle for commodities as a whole, there are pockets of opportunities in the sector, says Chris Osmond, CIO at Prime Capital Investment Advisors based in Overland Park, Kansas. It’s hard to foresee a bust period in base metals like copper when they’re so heavily used for green infrastructure spending, for example. But we could see a bust in oil for the same reason — a push for efficient energy utilization and green infrastructure.
Why should I invest in commodities?
Commodities are a type of alternative asset class. They provide two benefits: diversification away from stocks and bonds, and a hedge against inflation, says Will Rhind, founder and CEO of GraniteShares based in New York.
Historically, commodities have acted differently from stocks and bonds when it comes to risk and reward. Low correlation between asset classes is key as it allows some of your portfolio to do well — or at least hold steady — if another plummets.
Commodity prices have historically had a high correlation with inflation, with a rise in prices often coming at the beginning of an inflationary period or being the initial root cause of that inflation. By investing in commodities, an investor can profit from those rising commodity prices.
Just make sure to look at other ways to add to your mix, like with infrastructure assets or real estate, so you can build a diversified basket. Osmond advises no more than 20% exposure to alternatives in general, but those approaching retirement or in retirement should pay special attention to potential liquidity restrictions, and make sure the investment fits their needs.
How much of my portfolio should be in commodities?
If you want to invest in commodities, Calcagni recommends a diversified commodities ETF or mutual fund.
“I would be careful of individual investors trying to make a big bet on one or two specific commodities,” he adds.
Someone who is further from retirement can handle more risk, like a portfolio heavier in stocks and commodities, Rhind says. In today’s environment, where investors may have too much equity risk and need to lighten up on bonds due to rising interest rates, having 5%-10% overall portfolio exposure to commodities could make sense, depending on the specific financial situation and goals. That could be higher, like 10%-20%, for someone 30 years out from retirement and lower, around 0-5%, for someone within five years of retirement.
Plus, ask yourself why you want exposure to commodities, Osmond says. Is it fear of missing out, like we saw with GameStop? If so, be cautious, as the market has a way of correcting itself.
For investors within five years of retirement, Calcagni recommends allocating no more than 5% of an overall portfolio to alternatives. For investors with longer time horizons, Calcagni would limit alternatives exposure to no more than 15% of one’s portfolio.