The ETF Portfolio Strategist: 15 September 2021

Trend Watch

US consumer inflation eased more than expected in August, hinting that the recent surge in pricing pressure may be cooling. But if this was a sign for commodities prices to ease, the market didn’t get the memo.

A range of raw materials have been shooting higher recently, giving support to portfolios with allocations to the asset class. By some accounts, the latest gains confirm the view of some analysts that commodities have entered a new super-cycle. Perhaps, but we’re not convinced, at least not yet.

The economy is still vulnerable to the risks from the Delta variant of the coronavirus and the mu variant may pose an even greater threat this winter.

For now, however, our modeling points to an economy that’s still expanding at a strong pace and the expected slowdown that’s been unfolding in recent months will be moderate and extend well into 2022. That could change, depending on how or if the pandemic ramps up in the colder weather, but at the moment a major threat to economic growth doesn’t appear imminent.

That leaves room for commodities to rally, as recent trading activity reminds. An analyst at Goldman Sachs wrote in a research note on Monday that “physical goods demand has reached such high levels -- above pre-pandemic trends in all but oil -- that the system is becoming increasingly constrained in its ability to supply these goods.” Jeff Currie added that “markets are becoming increasingly exposed to any type of supply disruption or unexpected demand increase.”

Let’s take a quick look at several commodities ETFs for a summary of how the market is evolving (through today’s close, Sep. 15), starting with our standard choice for broad commodities exposure: WisdomTree Continuous Commodity Index Fund (GCC), an equal-weighted portfolio that’s held in our Global Beta 16 (G.B16) portfolio benchmark (see here for details).

GCC popped 1.3% today, rising above its recent range to its highest close in a month-and-a-half. It’s debatable if this marks the start of an extended upside run, but the ETF is certainly edging closer to a bullish pattern.

Broadly diversified commodities funds that give heavier weight to energy (on the reasoning that the economic footprint for oil and gas deserves a higher allocation) are posting a stronger upside profile. The iShares S&P GSCI Commodity-Indexed Trust (GSG), for example, closed up 2.1% today, reaching the highest level since January 2020.

For a clearer view of energy’s recent strength, consider Invesco DB Energy Fund (DBE), which focuses primarily on crude oil and gasoline futures. After today’s 1.9% pop, DBE is at its highest level in nearly three years.

Gold, by the way, didn’t participate in today’s rally. In fact, SPDR Gold Shares (GLD) slipped 0.6% and continues to churn in a tight trading range.

At the opposite extreme, United States Natural Gas Fund (UNG) continued surging, rising to the highest level since late-2019. A factor in the ongoing rally is the loss of output in the Gulf of Mexico region due to Tropical Storm Nicholas. Another factor is the supply shortage in Europe, which is attracting wider attention too as the colder weather approaches. “People are starting to throw the ‘crisis’ word around” when it comes to Europe, advises John Kilduff with Again Capital, noting that natural gas storage on the Continent is 16% below its five-year average and at a record low for the month of September.

Another segment of the commodities market that’s heating up: industrial metals. Invesco DB Base Metals Fund (DBB), which targets aluminum, copper and zinc, is just below a 10-year high. A sharp mismatch in supply-demand is lighting a fire for aluminum, for instance. “The aluminum supply chain has been ravaged by an unforgiving series of disruptions, which created asymmetries in price action that have helped propel prices towards decade highs,” note analysts at TD Securities.

The rallies noted above, however, pale next to uranium’s skyrocketing behavior of late by way of shares in the industry. Global X Uranium ETF (URA) has spiked this year, rising more than 100% year-to-date. The fund, which holds a mix of companies involved in mining uranium and producing nuclear components, jumped 6.5% in today’s session, reaching its highest price since 2014. ■