Outlook for commodities: opportunities in some lesser followed, but everyday important commodity markets

For commodities investors, ‘There’s a lot more to commodities than oil and gold,” says Calgary’s Auspice

Published Dec 24, 2024  •  Last updated 0 minutes ago  •  6 minute read

Lesser followed commodities, such as coffee, orange juice, cattle, cocoa and other agricultural markets driving increasing food prices have been the strongest performing sector in 2024. Photo by Torsten Asmus/Getty Images iStockphoto files

In the 1970s the Goldman Sachs Commodity Benchmark delivered a cumulative 587 per cent, versus just 17 per cent for the S&P 500. The 1980s and 2000s also produced similar 10-year periods when commodities outperformed equities by a wide margin.

Article content

Article content

Each one of these bull markets had one, if not two, multiyear consolidations before the biggest move in the cycle; short-term corrections within a longer-term bull market. Calgary based Auspice believes we are rounding the corner on a similar consolidation within a commodity bull market.

Article content

There are always surprises in commodities. It wasn’t too long ago when investors were exuberant around so-called “energy transition” commodities. Now we look back, lithium, cobalt, and natural gas are among the worst performing markets in 2024. The long-term fundamentals are compelling, but timing is everything.

Article content

As we enter 2025, timing for these and other commodities may be opportune. The U.S. election result and Republican platform is widely considered inflationary, with commodities a key component in this. Protectionism, tariffs, energy security – these policies come at a time when cost-push inflation (when the cost of production increases, leading to higher prices for consumers), driven by wages, has already begun to creep back up. Central banks do not have a lever to control this by raising rates, as they do for demand-pull inflation (when the demand for goods and services is higher than the supply, causing prices to increase).

Indeed, so called “agflation” has been increasing since the spring. While energy markets have corrected, the United Nations Food and Agriculture Organization’s Food Price Index, the global proxy for world food prices, has been increasing steadily since March.

Article content

Article content

The team at Auspice sees many opportunities in some of these lesser followed, but everyday important, commodity markets. Coffee, orange juice, cattle, and cocoa, agricultural markets driving increasing food prices, have been the strongest performing sector, many making all-time highs again in 2024.

As we say often, “There’s a lot more to commodities than oil and gold.” Many smaller, emerging commodity markets have improving liquidity and offer increased diversification benefits given local supply and demand factors. Some of the agricultural markets, for example, were out of focus during the “goldilocks” quantitative easing period and didn’t have ample liquidity. That’s all changed in the past few years.

We see many opportunities in some of the transition markets; commodities such as lithium, cobalt, and carbon emissions. Not only are these less correlated to other headline commodities, but they have come under significant price pressure. We think they could be great opportunities when the trend reverses, and that could be soon given the long-term supply-demand imbalances.

Article content

We are a rules-based trend follower, one of the differentiating factors in the way Auspice invests versus other commodity fund managers. We rely on momentum, or price-based trends, to determine our position. Fundamentally we’re bullish on natural gas; it’s probably our favourite market. But the trend is definitely down, hence we’ve been short most of the year. Sometimes you have to go against your gut with commodities, like being short oil when it trades at $10 a barrel as it did at the onset of COVID.

This year has been a tricky year for commodity fund investors and fund managers alike. While a couple of markets, such as gold and cocoa, have been strong this has not been the case across the board. The main benchmarks, the Goldman Sachs broad commodity index (the S&P GSCI) and the Bloomberg Commodity Index (BCOM) are both flat year-to-date, and well below 2022 highs. Risk management — avoiding the steep, often unanticipated draw-downs — has been key.

In consolidation periods such as 2024, sometimes doing less is more. If you’re a more active commodity trader you have probably been whipsawed a fair bit in the past two years. But it’s a trade-off. Agility and being reactive can pay off immensely, particularly at inflection points. Such was the case during the first half of 2020 as COVID rattled markets, and during the first half of 2022 as equity and bond markets corrected alongside the Russian invasion of Ukraine.

Article content

Following two years of muted opportunity, the Auspice team thinks commodities and CTA (commodity trading advisers) strategies will be a good place to be in 2025, and some of the biggest pensions are looking to position accordingly. Institutional investors are adding significant exposure to their portfolio. Ontario Teachers’ Pension Plan, for example, is increasing their commodities weighting to 11 per cent, up from an already significant nine per cent previously. The team at Auspice is seeing the renewed interest firsthand, three institutional mandates – including two university pensions and endowments – in the last three months.

And by commodities, the team at Auspice means direct exposure, as is the case with Teachers’, not resource equities. Direct commodity exposure via futures and CTAs historically have provided better diversification benefits as they tend to have much lower equity correlations than resource equities. Further, the business, financial risk and overall high correlation to equity markets as a whole, associated with resources equities, can detract, and do so significantly at times.

Article content

Consider gold mining exchange-traded funds (ETFs), which are still trading at price levels experienced in 2006, whereas the spot price of gold has increased almost 400 per cent since then. And while there are positives that can be said about gold as a diversifier and store of value, it is not a great inflation hedge. After making highs in the summer of 2020, following the COVID outbreak, gold traded sideways for three years, while broad commodity and CTA benchmarks delivered strong performance as inflation returned.

As for the long-term commodity outlook, we are bullish broadly on the asset class. It’s early in the cycle. Capital expenditure (CAPEX) hasn’t surpassed 2014 levels, and the energy and infrastructure demands are multiples of what they were a decade ago. But that does not mean commodities will go straight up. There will be ebbs and flows, just as we saw in the seventies, eighties, and the aughts. We think we may be entering the third or fourth inning of the cycle when commodities have historically outperformed equities by a wide margin.

After outpacing equities for two years starting in the summer of 2020, commodities have lagged equities considerably since then. Considered alongside equity valuations, with the S&P 500, for example, at near record levels, the risk to reward may be compelling.

Article content

Recommended from Editorial

1. 

   How many baskets does your investment portfolio need?

2. 

   5 things to remember as the U.S. stock market enters bull run

3. 

   How much of your portfolio should be in ETFs?

Rather than chasing returns, we suggest chasing good strategy, experience and disciplined risk management, for example with an experienced fund manager or a CTA. CTAs have been around since the 1970s and broadly outperformed the long-only BCOM and GSCI commodity benchmarks by a wide margin, and also outperformed the S&P/TSX Composite Index. They have also done so with a fraction of the risk. Since 1987, after the CTA category benchmark, the Barclay BTOP50 CTA, launched, the TSX’s worst pullback was -50 per cent and the BCOM -72 per cent, with the BTOP50 CTA a mere -16 per cent.

Today, amidst a correction, we feel commodities and trend-following CTA strategies are essentially on sale. Now may be an opportune time to re-balance out of recent equity strength and into tactical commodity strategies.

Tim Pickering is founder and chief investment officer at and Brennan Basnicki is partner at Auspice Capital Advisors Ltd.

Bookmark our website and support our journalism: Don’t miss the business news you need to know — add financialpost.com to your bookmarks and sign up for our newsletters here.

Article content