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Opportunity in commodities?


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I've been reading the Q2 2020 fund letters and quite a few guys are bullish on commodities generally and in particular gold, copper and energy.

I've summarized below the kind of arguments they are making.


The general argument is that real assets have never been cheaper relative to financial assets and they tend to do very well in an inflationary environment and especially one characterized by currency debasement.


e.g. Gold: money printing and negative real interest rates and newfound capital discipline in the sector and a wave of consolidation as rather than spending on new mines companies are preferring to buy their competitors.


e.g. Copper: supply very tight with very few new projects in the pipeline and incentive prices a lot higher than the current price. Demand likely to be robust especially if EVs take off in a big way. Also because of its scarcity in the same way as gold will be worth a lot more as fiat money gets debased.


e.g. Oil: a lot of supply destruction due to shut-ins with some of that production never coming back online. Shale productivity already showing signs of decline and high grading has reduced the room for capex cuts without the price of steep production declines. Banks are no longer willing to extend capital to fund production growth so companies are showing a lot more capital discipline and talking in terms of free cash flow rather than production growth. Demand will eventually recover. A lot of the majors and big service companies trading at similar levels to 20-30 years ago. A lot of negative sentiment because of popularity of ESG investing and hype about electric vehicles. And of course oil is trading at $40 and very few companies are making any money.


e.g. Gas: will be beneficiaries of production cuts and shale productivity declines because of the loss of all the associated production and demand is robust and growing over time as gas takes more share of total electricity production. Sector has been in a really long and really deep bear market.


I also note that in decades where stocks have gone nowhere e.g. the 1970s and 2000s you often see commodities do very well.


So it does seem worth having about a 10-20% allocation especially as the major indices such as S&P 500 now have a very low exposure. Also note that I am primarily talking in terms of owning commodity producers and associated service companies rather than the commodities themselves.


Is anyone else interested in this space and able to offer any thoughts or insights or expand on the bull thesis or counter with the bear thesis?






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Ive been looking a little bit into this, and the general bull case as well.


Not much to add other than maybe to add lumber to the list. Agree on copper. There's probably a few scenarios where you can do well even without major inflation...homebuilding will likely continue to see major tailwinds.

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Given the trend in vehicle and RV sales, there should be a continous demand for oil from the largest consumer group. The risk/return profile at currently level is definitely attrative to me.


People with RV‘s often don’t drive that much with them over the year. I doubt it makes a difference for gasoline or diesel consumption in the US, much less the world.

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