Other commodity prices rise
It wasn’t just oil prices affected by the conflict in Ukraine. “The Russia-Ukraine war and potential interruptions of grain deliveries from those two agricultural-exporting countries added a degree of uncertainty to the grain commodities market as well,” says Haworth. Yet he believes that, as is usually the case, weather remains the biggest factor affecting prices for agricultural commodities. “Wheat, corn and soybean prices rose in mid-summer 2023, but not above previous high levels,” says Haworth. Food prices have since eased from earlier highs. For the 12 months ending in April 2024, food costs, as measured by CPI, were just 2.2% higher than a year earlier, compared to the overall inflation rate of 3.4%.1
Metals prices can be considered in two categories – precious metals such as gold and silver, and industrial metals used in manufacturing, such as nickel and copper for electric vehicle batteries. Gold prices dropped to a low of $1,831/ounce in October 2023, but rose more than 30% by mid-April 2024, to $2,413/ounce.3 It’s not clear whether the upward trend will continue, but a persistent inflation rate in excess of 3%,4 with few signs of an immediate decline, may explain gold’s renewed popularity.
As for industrial metals, Haworth says supply concerns are an issue, particularly with more robust demand driven by increased production of electric vehicles. Minerals such as cobalt and nickel are key components for electric vehicle batteries.
Investor considerations around commodities
Investors sometimes consider including commodities in a portfolio to hedge the impact of higher inflation. Given that inflation remains stubbornly high in today’s environment, “markets today offer a good opportunity to add some commodity exposure,” says Eric Freedman, chief investment officer, U.S. Bank Wealth Management.5 The environment may present the potential to diversify into infrastructure, real estate, precious metals and agricultural products, all of which can benefit as prices rise.
Infrastructure options include companies involved in oil pipelines, airports, cell towers, toll roads and other forms of infrastructure. “There is strong demand in many of these areas today,” says Haworth, “but benefitting from owning these investments doesn’t always require that prices move higher. These investments also generate regular income for investors.” Haworth says companies in infrastructure-related businesses tend to have fixed costs but realize bigger profits in times when inflation drives prices higher.
Haworth says commodities sometimes are more effective as a tactical position in a portfolio. “It’s difficult to earn a durable return with direct investments in commodities or commodity futures,” he warns. “However, commodities historically offer positive returns in environments of elevated inflation, as we are seeing now.”
Investors should be prepared for frequent changes, both higher and lower, in commodity prices. Talk with your financial professional about opportunities to position your portfolio to capitalize on market trends stemming from the commodities trade.