Commodities & Inflation

Nov 15, 2022

Callum Bruce, a Commodities Specialist at Goldman Sachs, shares insights on navigating today's tumultuous investment landscape. He discusses how both stocks and bonds are faltering in the face of rising inflation, leaving portfolios vulnerable without a reliable hedge. Callum highlights commodities—like oil and wheat—as vital assets for diversification. The conversation also covers the evolving dynamics of commodities and currency, the shift toward alternative energy, and the investment potential within this often-overlooked market.

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INSIGHT

Commodities as an Alternative Hedge

The traditional stock-bond portfolio balance is faltering due to simultaneous declines, driven by inflation.
Commodities like oil, wheat, and copper offer a potential hedge in this unusual situation.

INSIGHT

Homogenous Nature of Commodities

Commodities are homogenous goods, meaning a barrel of oil is the same everywhere.
This homogeneity simplifies market creation and trading.

INSIGHT

Commodity Pricing Dynamics

Commodity prices are influenced by cost of carry, including storage costs and convenience yield.
High storage costs (e.g., natural gas) lead to contango, while high convenience yield (e.g., oil) can cause backwardation.

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One of the most common portfolio constructions is a blend of stocks and bonds. The stocks power growth during times of economic expansion and bonds act as a hedge, since bond prices tend to rise when the economy is in recession. If one goes down, the other goes up. Except for right now.

Since the start of 2022, both stocks and bonds are down. It’s the first time that’s happened since the late 1960s. The culprit? Our old friend, inflation. The Federal Reserve’s aggressive response to inflation has the market worried about a recession. Investors have responded by selling, driving stock prices down. But higher interest rates decrease the value of bonds as well. Suddenly, a lot of portfolios are without a hedge. So how do you protect your investments in this unique, uncertain time?

One answer is commodities: everything from oil, wheat, copper and cattle. They’re one of the most powerful hedges against inflation–but it’s also a different kind of asset class, subject to all sorts of unique risks. To operate with confidence, you need to learn the language of commodities. Fortunately, we know someone who’s fluent: Callum Bruce, Commodities Specialist at Goldman Sachs.

With Callum’s help, we’ll delve into the power, precariousness and possibility of the commodity; everything from what they are and how they work, to why Callum thinks they’re undervalued. Plus, the commodity constraints coming down the road and the surprisingly strong link between certain commodities and the value of the dollar.

So come with us as we explore the cutting hedge, where the oddities are good and the goods are commodities.

Highlights:

Definition & types of commodities (3:19)
The benefits of trading commodities–for producers and consumers (5:16)
Cost of carry & contango (6:12)
Convenience shield & Backwardation (7:07)
Why volatility makes commodities a powerful hedge (9:16)
How commodities might theoretically fit into a portfolio (11:03)
Why Callum sees opportunity in commodities (12:08)
Commodity-constraint (13:31)
Dollar-oil correlation (16:13)
The future of energy commodities (19:20)
Metal markets: Double bullish (22:11)
Don’t go it alone: the complexity of commodities (23:26)

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If you have questions about the show or topics you'd like discussed in future episodes, email our producers, sheena.cochran@cadencebank.com or danielle.kernell@cadencebank.com.