Displaying items by tag: Commodities

This year, global commodity prices have been highly unstable, maintaining generally high levels. Futures for orange juice and cocoa have reached unprecedented peaks in the early months, while crude oil prices have been influenced by events in the Middle East. Gold continues to climb, though base metals such as iron ore have seen substantial declines.

Sabrin Chowdhury, a lead commodities analyst at BMI, observed that the market has been particularly sensitive to changing sentiments, quickly reacting to both positive and negative news. The S&P GSCI index, a measure of overall commodity market performance, surged by 12% in April but has since moderated to a 2.18% increase for the year.

Data from FactSet indicates that certain soft commodities, including cocoa, eggs, orange juice, rubber, and coffee, have seen significant price increases. Analysts suggest that adverse weather in key production areas is a major factor behind these gains.

Finsum: We’re slightly bullish on energy commodities moving into the fall as interest rates fall and economic demand picks up steam. 

Rising interest in commodities like gold, oil, and grains, fueled by concerns over inflation and climate change, is impacting the design of fixed indexed annuities and registered index-linked annuities. This shift appeals to clients seeking hedges against inflation and additional asset diversification. 

While traditional indices like the S&P 500 dominate annuity allocation options, commodity indexes are emerging as viable alternatives, offering potential returns between 3% and 5.5% annually. Index exposure varies, with some annuities offering direct access to single commodities, like gold, while others provide diversified commodity index options. 

The inclusion of these indexes signals a broader trend toward more diversified and defensive investment strategies within annuity products, catering to clients' evolving needs in a changing economic landscape.

Finsum: These annuities could provide a natural way to get industry exposure and hedge against key issues like inflation.

What is the best way to manage a portfolio in an era with less structural disinflation, and how can you improve upon the 60/40 in the current environment 

 The traditional 60/40 portfolio, consisting of 60% stocks and 40% bonds, has long been a benchmark, balancing growth from stocks with stability from bonds. However, the historical success of this model relies on a period of declining interest rates and favorable economic conditions in the U.S., which may not persist in the future. 

As interest rates stop declining and inflation potentially rises, the performance of the 60/40 portfolio is expected to be less impressive, especially during high inflation periods when energy and commodities tend to outperform. To better manage portfolios in this new environment, it’s advisable to diversify beyond the 60/40 mix by including assets like commodities, real estate, and cash equivalents to hedge against inflation and provide more stability during economic shifts.

Finsum: We have seen an increased correlation between stocks and bonds in the most recent years suggesting alternative diversification to manage volatility. 

A noteworthy development in 2024 has been soaring uranium prices. The radioactive metal was up more than 90% in 2023 and is now at its highest levels since 2007. According to Ole Hansen, the head of commodity strategy at Saxo Bank, this move is being driven by increased demand from ETFs holding physical inventory and utilities who were not hedging due to years of low prices. 

Prices moved past $100 per pound last week following an announcement from Kazakhstan's state uranium company that it may fail to meet production goals due to construction delays and difficulty sourcing raw materials. This follows a slew of production downgrades from a variety of producers in 2023, adding to pressure on the supply side. 

On the demand side, analysts point to the Sprott Physical Uranium Trust and Yellow Cake as marginal sources of gold demand, contributing to the ‘squeeze’. As a result, many now expect uranium to exceed all-time highs from June 2007 of $136 per pound, and uranium miner equities have also been following the metal higher. 

Longer-term, many believe that the uranium market is at a deficit given the gap between yearly production and consumption. Currently, the gap has been made up by huge amounts of secondary supply, yet this inventory is also rapidly being depleted.  

Finsum: Uranium prices have continued momentum from last year. Many believe new, all-time highs are in store given increased demand from ETFs and utilities, while production is impaired.

The US Department of Labor is proposing a rule to close loopholes around the fiduciary standard. Specifically, they are looking at rollovers from 401(k) plans to IRAs; products not regulated by the SEC such as indexed annuities and commodities; and recommendations to employers on which funds to offer in 401(k) plans. 

The SEC raised the bar for financial advice in 2019, applying the fiduciary standard to most types of investments. Yet, there are certain areas where the SEC doesn’t have jurisdiction. However, the Department of Labor does have regulatory authority over retirement accounts. 

The fiduciary standard mandates that any investment recommendations need to be made in the best interest of clients and that any conflicts of interest should be disclosed. This has major implications given that nearly 6 million Americans rollover approximately $600 billion into IRAs every year, while 86 million Americans are putting money into their 401(k) plans. Indexed annuity sales were $79 billion in 2022 and expected to easily exceed this amount in 2023. 

According to the administration, hidden costs and junk fees are denting households’ retirement savings by up to 20%. However, there is some pushback as critics contend that these rules will lead to more confusion, expenses for compliance, and eventually negatively affect retirement plans and retirees. 

Finsum: The Biden Administration is looking to expand the fiduciary standard to cover areas that fall outside of the SEC’s jurisdiction such as commodities and fixed annuity products.