Big US bank: Swap bonds for commodities

In the investment world, especially in the US, for decades, many experts have recommended a classic structure for investments, where 60 percent of the money is placed in stocks and 40 percent in fixed income assets (mainly bonds, especially Treasuries).

However, strategists at Bank of America, one of the four largest US banks, say that such investment may no longer be the most profitable strategy in the 2020s. According to them, it is worthwhile for investors to exchange bonds for raw materials instead, because the long-term cycle of rising prices of raw materials is just beginning.

According to analysts, high inflation will be long-term, and because of this, commodities will offer better returns than bonds this decade. “The commodity bull market (bull market) is just beginning,” said strategists led by Jared Woodard and Michael Hartnett. “This asset class will outperform bonds in the 2020s.”

Commodity prices have fallen after the 2022 peaks as markets worry about a possible global economic downturn and a cooling of China’s economy. However, the S&P GSCI index reflecting the prices of raw materials has still increased by 64 percent compared to the bottoms of 2020. This means that the annualized yield of raw materials has been at 10-14 percent this decade.

The era of high inflation has begun

“The long-term rise in commodity prices is just beginning, as debt levels, national budget deficits, demographics, deglobalization, artificial intelligence and zero-emissions policies are all inflationary,” BofA strategists said.

Although the pace of inflation has come down compared to the peaks of 2022 in both the US and Europe, BofA strategists expect a new acceleration of inflation, which will be boosted by the aforementioned factors. They pointed out that inflation used to be around 2 percent in the 2000s and 2010s due to globalization and technological advances. However, this may soon change, and the 5 percent annual inflation we saw before the 2000s will become normal again.

“A reversal of these trends means that structurally, inflation will return to 5 percent,” Jared Woodward said. The consumer price index rose by 3.4 percent in 2023, and in July, price growth in the US was 2.9 percent year-on-year.

Commodities instead of bonds

All of this means that commodities are a better asset class to allocate 40 percent of assets that are typically invested in bonds.

Although the prices of raw materials as a whole have moved down by about one percent this year, precious metals have shown a very good performance this year. The price of gold is up about 21 percent this year and is up 35 percent since the start of 2022. It was at the beginning of 2022 that the pace of inflation gained momentum.

Tavid analyst Mait Kraun’s comment:

I broadly agree with the BofA strategists – I see this decade being the decade of commodities, with the price increase likely extending into the 2030s. The high debt levels of many Western countries, Japan and China will be a big problem in the coming years, which will also have a great impact on the bond market. There is also a very rapid geopolitical polarization and the world has begun to deglobalize, which is a very inflationary process. In the long term, more and more capital will move from bonds to commodities, because commodities offer the best protection for investors in an inflationary environment.

During economic downturns, raw materials tend to become cheaper, at least temporarily, as we saw both after the 2008 and 2020 crises. Since, in my opinion, cyclically, raw materials have entered a long-term rising cycle, it is extremely likely that the crisis will be followed by a very rapid rise in the prices of raw materials, which will last for years. Adding fuel to the fire is the reaction of the central banks and the government to the next crisis, which is not difficult to predict – this time, too, the governments will let the budgets go even deeper into the red, and the central bank will start new rounds of money printing. Such an environment is very supportive of raw materials.

In my opinion, the post-crisis environment will be very similar to the 1970s, when commodity prices rose enormously – for example, the price of oil rose from $2 to $40 in a decade, the price of gold rose from $35 to more than $800 an ounce in less than a decade. Below you can also see the annual return of gold since 1971, when the world abandoned the gold standard.