2023-12-07 14:12:36 ET
Summary
- Commodity prices have been steady in 2023, with mixed performance across different sectors.
- The bull market in commodities began in 2020 due to central bank liquidity, declining fiat currency values, and low inventories.
- Geopolitical tensions and economic uncertainties suggest higher commodity prices in 2024, making a diversified approach to commodity exposure important.
- abrdn Bloomberg All Commodity Longer Dated Strategy K-1 Free ETF is an unleveraged- no K-1 ETF product that could benefit from current trends.
Commodities are global assets that feed and power and are the building blocks for infrastructure. Raw material prices are highly sensitive to worldwide markets, reflecting the geopolitical and economic landscapes. Inflation erodes the value of fiat currencies, which tends to lift commodity prices.
The United States is the world’s leading economy, and the U.S. dollar is the global reserve currency. The dollar is the worldwide pricing benchmark for most commodity prices. As the markets head into 2024, traditional equity and debt markets have been volatile, and investors and traders have increased allocations to alternative investments. In late 2023, the prices of gold, an international currency and commodity, and Bitcoin and cryptocurrencies increased. The price action could mean the U.S. dollar’s and fiat currencies’ value have declined, and other alternative asset classes will attract buying over the coming months. Moreover, the bifurcation of the world’s nuclear powers and emerging BRICS bloc could shift supply chains and cross-border transactions.
Commodities are essentials required by countries and people worldwide. Allocating a percentage of investment portfolios to the raw materials asset class could be an excellent strategy for the coming year.
The abrdn Bloomberg All Commodity Longer Dated Strategy K-1 Free ETF ( BCD ) is a product that could have upside potential for the coming year.
A quiet year for the commodities asset class-Inflation versus rate hikes
As of December 7, commodity prices were mixed but mostly steady in 2023. The following breakdown by sector shows the ups and downs in the raw materials asset class for the year as the end of 2023 approaches:
Precious Metals - Gold was higher, silver was nearly unchanged, while platinum and palladium were lower.
Base Metals - The prices of copper, aluminum, nickel, lead, zinc, and tin were lower.
Energy - Oil, oil products, natural gas, ethanol, and Rotterdam coal prices moved lower.
Grains - Soybeans, soybean products, corn, wheat, and rice prices were lower, while oats edged slightly higher.
Softs- Cotton was little changed, while sugar, coffee, cocoa, and FCOJ posted gains.
Animal proteins - Live and feeder cattle prices were higher, while lean hogs declined.
At the end of Q3, a composite of the 29 most liquid commodities trading on U.S. and U.K. exchanges was only 0.12% higher in 2023. In March 2022, the U.S. Federal Reserve began increasing the short-term Fed Funds Rate from zero percent. While the FOMC paused at its last two meetings and will likely continue to keep rates at the current level at the December meeting, the Fed Funds Rate is at 5.375%. Meanwhile, quantitative tightening has pushed rates higher further along the yield curve.
The chart shows the drop in the U.S. 30-year Treasury bond futures to a 107-04 low in October 2023, the lowest level for the long bond futures since April 2007. Higher interest rates weigh on commodity prices as they increase the cost of carrying inventories. However, over time, high rates because of inflation increase the cost of production and financing, pushing prices higher as marginal producers exit the market. While commodity prices were mostly steady in 2023, with gains in some offsetting losses in others, they remain far above the prices at the 2020 lows.
The bull market began in March 2020 for three reasons
The 2020 global pandemic disputed worldwide supply chains and weighed on the demand for many commodities. Nearby NYMEX crude oil futures fell below zero for the first time, and many other commodities fell to multi-year lows.
As the U.S. Fed and other central banks slashed interest rates and flooded the global economy with liquidity and governments unleashed a tidal wave of stimulative measures to fend off a financial crisis, they planted inflationary seeds that spouted and grew, causing raw material prices to soar. The three factors that launched a bull market in the commodities asset class were:
- Central Bank liquidity and Government stimulus
- The decline of fiat currency values
- Low inventories that led to shortages as demand recovered.
While the overall commodity asset class did not follow through on the upside in 2023, many raw materials remain far above the 2020 lows in late 2023.
Geopolitics and economics suggest higher prices in 2024
In February 2022, the Russian and Chinese leaders shook hands on a “ no-limits ” alliance. Russian troops invaded Ukraine less than one month later. The U.S. and NATO members have supported Ukraine in its ongoing war against Russia.
On October 7, 2023, a terrorist attack on Israelis ignited a war in the Middle East. The conflict has further divided the war. The bifurcation of the world’s nuclear power significant impacts global trade and supply chains. The wars continue as we head into 2024, and geopolitical divisions have caused substantial tensions. The Doomsday Clock at ninety seconds to midnight is the closest to a global catastrophe in history.
Meanwhile, the U.S. remains divided along political lines. The 2024 Presidential election looks set to rerun the 2020 contest. President Biden, with historically low approval ratings, will likely face former President Trump, who is facing 91 felony charges. The current polls show the former President with a slight lead with under eleven months until Election Day. The election will determine if the U.S. policies continue or revert to the pre-Biden administration landscape.
Markets reflect the economic and geopolitical landscapes, which remain highly uncertain in late 2023.
A diversified approach to commodity exposure for 2024
Even the most aggressive bull markets rarely move in straight lines. While the bull market in commodities began at the early 2020 lows, 2023 has been a mostly quiet year for the overall asset class.
Meanwhile, the many issues facing markets across all asset classes could mean that commodities prices could resume an upward trajectory in the coming year. While picking individual commodities could enhance or limit results, a diversified approach will likely yield the smoothest and least volatile results. There are many products and ETFs that move higher and lower with a diversified basket of commodities; the abrdn Bloomberg All Commodity Longer Dated Strategy K-1 Free ETF ((BCD)) may offer commodity investors benefits.
BCD is an unleveraged, no K-1 ETF product - The performance from the March 2020 lows to the 2022 high indicates the potential if commodity prices rise in 2024
BCD has two significant benefits. It issues no K-1 for tax purposes, which many market participants favor. Moreover, it invests in commodities prices three months into the future, which tends to decrease volatility and reflect supply and demand fundamentals as the most price action occurs in the commodities for nearby delivery, which tend to be dominated by highly speculative buying and selling activity.
BCD’s fund profile states:
As of December 7, BCD’s top holdings include:
According to the fund summary, the “ Equity Other ” holding is a “ three-month forward version of the Bloomberg Commodity Index. ” In 2021, the target weighting was:
The index remains diversified in 2023 and will maintain its diversification in 2024.
At $31.59 per share on December 7, BCD had around $225.75 million in assets under management. The ETF trades an average of 53,057 shares daily and charges a 0.30% management fee. In mid-December 2022, BCD paid shareholders a $1.801 per share dividend, translating to a 5.7% yield at today’s share price. While there are no guarantees of future dividends at the mid-December 2022 level, no K-1 ETF products often pay shareholders significant dividends.
The ten-year chart highlights the 127.7% rise from the March 2020 $18.71 low to the June 2022 $42.61 high. BCD pulled back to the $31.59 level on December 7 and was 8.7% lower than the December 2022 close. abrdn Bloomberg All Commodity Longer Dated Strategy K-1 Free ETF is an ETF that provides commodity price exposure for the coming year.
For further details see:
BCD: A Bullish Bet On Fixed Income And Commodities For 2024