Is it time to bet on commodities again?

Already riding a huge run-up from the pandemic lows, commodity prices accelerated with Russia’s invasion of Ukraine, peaking last summer. Raw materials subsequently tumbled from nosebleed levels, but some now expect a comeback.

The near-term bull case is predicated in part on economic optimism. After all, the US is apparently going to dodge a recession. Or at least according to+ America’s second-largest bank. And Beijing is surely going to provide for meaningful stimulus in the back half of the year. What choice do they have? And the Saudis are determined to put (and keep) a floor under crude prices.

I could go on. And in some ways, I’m being sarcastic. I’m not convinced the US will actually avoid a recession, and I have no faith whatsoever that China will actually deliver on promises to bolster the economy, or at least not the way they’ve delivered in the past, with big-ticket fiscal measures that simultaneously prop up global growth.

But commodities have been a “don’t look now” story over the past two months, up ~10% across June and July.

That’s the longest run of gains since November (in fact, those are the only monthly gains since November).

“Unloved commodities” are among the best-performing assets since the US debt ceiling resolution, BofA’s Michael Hartnett remarked.

Currently, the catalyst is the absent US recession. Whether the downturn is a total no-show or just late will be a key determinant for commodities going forward.

As the figure on the right above suggests, energy stocks may still be very cheap on a relative basis.

Hartnett enumerated the factors which together constitute a “2020s secular buy catalyst” for raw materials. There’s government policy (he mentioned the SPR, naturally), protectionism (he cited India’s rice export ban) and, of course, geopolitics (Hartnett cited China’s export restrictions on germanium and gallium, the Russia/Saudi oil nexus and the military coup in uranium-rich Niger).

I’d also point out that, ironically, the world’s panicked efforts to make the energy transition could easily be a boon to commodities. The “green revolution” will be enormously energy-intensive and extractive, so much so, in fact, that some proponents of so-called “degrowth economics” have suggested it’s a pipe dream. (That was the subject of the latest monthly letter+, which I’d immodestly call a must-read.)

YTD, commodities are still among the worst-performing assets on the board.