Commodities are an area where investors should be watching over the next decade, according to Bank of America.

Bank of America strategist Jared Woodard said in a report last Thursday that rising structural inflation suggests that "the commodity bull market has just begun."

Commodities such as oil and gold have long been considered reliable inflation hedges, and investors will be in greater demand for them if Woodard's forecast of a sharp rise in inflation comes true.

Woodard pointed out that the inflation rate has been stable at around 2% over the past 20 years due to trends in globalization and technological development, but now the United States may soon return to the inflation trend before 2000, when inflation rose by an average of about 5% per year.

Woodard said, "The reversal of these forces means that inflation will structurally shift back to 5%." The US CPI index will rise 3.4% in 2023, and data in July showed that the index rose 2.9% year-on-year.

While it is hard to imagine that the trend of technological disruption suppressing inflation will slow down, the trend towards deglobalization has strengthened in recent years.

Whether it is the high tariffs on some products or the support for the U.S. semiconductor industry, these policies have hindered price declines, especially since the cost of supporting local jobs in the United States is much higher than labor costs in emerging markets.

Bank of America said investing in commodities could generate an annualized return of 11% "because debt, deficits, demographics, deglobalization, artificial intelligence and net-zero emissions policies are all inflationary."

Commodity Index 10-year annualized return

These potential returns mean commodities would be a better asset class to replace the 40% typically reserved for bonds in a classic 60/40 portfolio.

Woodard highlighted that even with falling inflation and a dovish Fed, commodity indexes have generated annualized returns of 10%-14%, while the popular Bloomberg Aggregate Bond Index has generated just 6%.

Gold has been a particularly strong force behind the strong performance of the commodity sector. So far this year, the metal has risen about 21% to a record high, and has risen 35% since early 2022 when inflation began to accelerate.

On the other hand, oil prices have underperformed relative to gold. WTI crude oil prices were trading around $73 a barrel on Monday, roughly the same level as in August 2021.

Article forwarded from: Jinshi Data