I mentioned on Friday that the price of a barrel of crude oil was back over $80 … hitting prices last seen in 2014, before the energy glut. And this is just a little more than a year after prices went negative.
To go from sub-worthless to seven-year highs is quite the reversal.
But crude oil isn’t the only commodity that’s seen a rally of late. Copper is sitting close to all-time highs, as is fellow industrial metal hot rolled steel. Moving out of construction materials, cotton prices are at their highest in over a decade, and coffee is trading at seven-year highs. Corn prices have eased slightly in the past couple months but remain close to seven-year highs.
Why Commodities Are on the Rise
Prices aren’t just rising, They’re screaming higher.
As for the “why,” there are an assortment of reasons that created a perfect storm:
- Demand has recovered much faster than expected as the economy reopened, while production was sporadically disrupted over the past year and a half.
- Transporting commodities has become difficult due to a shortage of drivers, sailors and other labor in the transportation sector.
- Farm labor is nonexistent.
- Supply chains in general are a mess, and it’s been almost impossible to clear backlogs.
Does all of this mean that we’ll be suffering from high inflation for the foreseeable future?
Maybe … maybe not.
It depends on Federal Reserve policy, unemployment benefits, the private sector’s ability to clear the supply-chain logjam and a host of other issues.
Whatever happens will happen. I can’t change that. But I can identify an opportunity here.
How to Trade the Commodities Bull Market
Back in February, I wrote that commodities were dirt cheap, pointing out that they had never been as cheap relative to stocks as they were at that moment. I followed that up in June, writing that the commodities bull market had arrived.
The past months have only confirmed this. The S&P 500 is up a little less than 20% so far this year. But the DBIQ Optimum Yield Diversified Commodity Index, a broad index that covers a large swath of traded commodities futures, is up by about 46%. You can see the fund (green line) that tracks the index in the chart below.
We’re a long way from a top here. When commodities enjoy a bull market, they tend to trend higher for years. And most investors have zero exposure to the asset class.
With tech stocks and cryptocurrencies en vogue, the idea of trading wheat futures isn’t at the top of most investors’ minds. And even after the 46% surge this year, the same holds true. Commodities remain cheap relative to stocks and still unloved.
It makes sense to have some commodities in your portfolio. A nice way to get broad exposure to the sector without having to open a futures account and trade contracts is the DB Commodity Index Tracking Fund (NYSE: DBC). This exchange-traded fund (ETF) has exposure to energy, precious metals, industrial metals and agricultural commodities. Think of it as a one-stop shop for the commodities bull market.
There’s an old trader’s maxim that comes to mind:
There’s always a bull market in something.
That something today is commodities, and we want to be in on it.
To good profits,
Adam O'Dell
Chief Investment Strategist