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 February 2024, food costs, as measured by CPI, were just 2.2% higher than a year earlier, compared to the overall inflation rate of 3.2%.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 peaked in early May 2023 at $2,057/ounce, then dropped to a low of $1,831/ounce in October. However, gold prices recovered and stood just shy of $2,200/ounce in March 2024.4 It’s not clear whether the upward trend will continue. “Gold is often viewed as an inflation hedge, but with inflation scaling back (from a peak of 9.1.% for the 12 months that ended in June 2022 to 3.2% for the one-year period ending February 20245), gold may not hold the attraction it once did,” says Haworth.
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. Haworth says there are limited benefits with commodities investments. “It’s difficult to earn a durable return with direct investments in commodities or commodity futures,” he warns.
“The primary challenge in doing so is that historically, it’s a very volatile asset class,” says Haworth. “Investing in commodities often requires that you make two good decisions – to buy at the right time and to sell at the right time.”
Yet there are other approaches that can provide portfolio benefits in certain environments. One effective way to capitalize on today’s commodities market is through investments in infrastructure. This includes 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. However, Haworth notes that these firms are often dependent on financing, which is more expensive in today’s higher interest rate environment.
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.