What Drives Commodities?

Commodities are goods used as inputs in the production of other goods and services. They form the bedrock upon which more complex products are made. While the US economy has moved to have a much larger share in the form of services, none of these services would be possible without the commodities. The pervasiveness of commodities as inputs makes co

Nominal spending in the economy can originate from one of three sources: income, borrowing, or the sale of assets.

Finally, the sale of assets—such as selling cash, stocks, bonds, or real estate to finance spending—can also drive nominal spending. However, large-scale asset sales are usually indicative of a shortfall in economic activity and are typically used to essentially plug a hole in spending by economic actors rather than as a durable source of ongoing s

We think it is essential to recognize that there should be little to no risk premium for holding spot commodities in a portfolio. This is because productivity continues to make commodities easier to produce and, in turn, cheaper. This is particularly true when there is a continuously expanding production capacity and supply of commodities over time

When we invest in commodities, we refer to a broad basket of commodities, weighted in a manner that is largely consistent with each commodity’s contribution to economic activity

Thus, commodity prices tend to be dominated by demand forces over time, but when we approach capacity limits, supply forces can have extremely large impacts.