As inflation intensified in 2021, commodities proved their mettle, ranking as one of the year’s best-performing asset classes.
That was accomplished without the benefit of assistance from gold, but even though the yellow metal sat out the 2021 rally, commodities are entering 2022 with momentum, and that could prove beneficial to exchange traded funds, such as the WisdomTree Enhanced Commodity Strategy Fund (GCC).
Although the Federal Reserve made it clear earlier this week that it’s going to soon raise interest rates, one way of looking at that scenario is that the central bank is admitting that it’s late to the inflation-fighting party and inflation proved far more persistent than expected. Even with rate hikes nearly a sure thing at this juncture, GCC is up 4.71% year-to-date.
“Although central banks—including the U.S. Federal Reserve—have dropped their ‘inflation is transitory mantra’ and are preparing to tighten policy, their actions can only impact demand growth,” says Nitesh Shah, WisdomTree Europe head of research. “A key source of much of the inflation we have seen in the past year has been supply-side disruptions. As Omicron cases rise globally, there is a cogent reminder that supply-side frictions are not guaranteed to dissolve.”
Another assist to GCC, and one with longer-ranging implications, is the move to environmentally friendly and climate-aware strategies and power sources. In some cases, the fight against climate change could lead to lower production of some commodities, removing supply from the market. On the other hand, some renewable energy concepts, like solar panels and wind turbines, are heavily dependent on select commodities, meaning that there’s steady demand for commodities in the renewable energy landscape.
Global infrastructure spending could also be another catalyst for GCC and commodities prices going forward.
“Following the COVID-19 pandemic, the political will to support infrastructure projects has strengthened. In Europe, a budget of close to €2.018 trillion in current prices has been devoted to the recovery. More than 50% of the budget will support modernization though research and innovation, fair climate and digital transitions and developing resources for health preparedness. All these initiatives will require some form of infrastructure improvements,” adds Shah.
Between infrastructure, renewable energy, and dwindling supplies, commodities and GCC could find support even if inflationary pressures ease.
“Commodities are a hedge for inflation and generally are likely to prosper, especially in the shadow of a monetary largess that is already in the system. Even if the inflation catalyst wanes as we move to the next business cycle, the boom in infrastructure and an energy transition will likely propel many commodities for years to come,” concludes Shah.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
