Seek opportunities in commodities

At a glance

Despite large swings, gold has been one of the top performing major asset classes of 2020. We believe the metal is well supported by falling real interest rates, a weak US dollar, and geopolitical risk. But broad commodity indexes have also gained this year, and we expect the rally to continue. We expect prices for precious metals, base metals, and oil to rise. Investors can consider using second-generation commodity indexes, which aim to reduce the cost of rolling futures contracts.

Opportunities in the commodity space

Gold has been a star performer in 2020, rising faster than even the Nasdaq in the first half of the year for a nearly 30% gain. The metal reached record highs above USD 2,000/oz early in the third quarter. Despite bouts of volatility, we believe gold's value will be underpinned by negative real interest rates, which eliminate the opportunity cost of holding the zero-yielding asset. Gold's value is also bolstered by a weak dollar and heightened geopolitical risk.

But beyond just the yellow metal, other commodity prices also have further to rise in our view.

This strength is likely to be based on the following key factors:

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  • Commodities should benefit as the global economy improves. Based on our historical analysis, quarterly commodity returns tend to be higher when economic growth accelerates. In our analysis, commodity returns tend to be double their 30-year average when looking at periods of accelerating economic growth in advanced economies.. That means waiting until growth is back above trend in the developed world may lead to investors chasing a rally. While commodities perform strongly in the later stages of an economic cycle, returns can also be found when economic activity accelerates, even from negative territory.
  • Supply constraints and low inventory levels are conducive for higher prices in several key commodities. Oil markets are a notable example. OPEC and its allies (OPEC+) have shown a great deal of unity. Given the group's discipline to maintain their output-cut deal, and with oil demand continuing to recover, the market is undersupplied and oil inventories are starting to drop. Finally, as economies reopen further, we anticipate a gradual recovery in demand for key soft commodities such as coffee, cocoa, and sugar.

So, we see a variety of opportunities in the commodity space. Among other recommendations, for broad long commodity positions, investors can consider using second-generation commodity indexes, which aim to reduce the cost of rolling futures contracts. More specifically, we expect prices to rise on a range of precious metals, including gold, silver, and platinum. We anticipate even bigger gains in industrial metals and energy. Specifically, we expect the recovery in oil to continue.

For more conservative investors who are able to use options, as an alternative to being long, the pickup in option volatility across all precious metals offers an opportunity to sell puts and earn yield from the option premium. Similarly, in oil, we recommend considering selling puts in Brent crude. 

Key investment takeaways:

  • Gold was a standout performer in the first half of 2020 and we expect the metal's price to be well supported in the second half of the year by negative real rates, a weak US dollar, and heightened geopolitical risk.
  • But gold is not the only commodity with appeal for investors. We have seen a broader commodity rally this year.
  • But beyond just the yellow metal, other commodity prices also have further to rise in our view.
  • Investors can consider using second-generation commodity indexes, which aim to reduce the cost of rolling futures contracts.

Options and futures are not suitable for all investors, and trading in these instruments is considered risky and may be appropriate only for sophisticated investors. Prior to buying or selling an option, and for the complete risks relating to options, you must receive a copy of "The Characteristics and Risks of Standardized Options." You may read the document at or ask your financial advisor for a copy.

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