After a heady nine months in the commodities space, investors are starting to ask whether the boom is over. Have we missed it? Is there still time to jump on the bandwagon? Fear not, we haven’t even started yet.

A quick look at the chart of the Bloomberg Commodity Index puts the recent past into proper perspective. After a painfully drawn out commodity bear market of the last decade, followed by a brief panic when the covid pandemic caught everyone off-guard (do you remember oil trading at negative $37?), commodities as an asset class have barely recovered to the levels of late 2010s. We are still below long-term average prices and far away from the peaks of the late 1970s or the 2008 super-cycle.

The inflationary 1970s provide a template to what can happen when monetary authorities lose control of prices. Inflation starts slow and easy to dismiss as “temporary” (this old-fashioned 1970s word has now been replaced with the hipper word “transient”). But as prices keep stubbornly climbing higher, the economy adapts by baking inflation expectations into everything. Workers demand higher wages, bond investors insist on higher interest rates, landlords charge higher rents, providers of capital raise their required returns. The only way to meet their expectations is to raise prices even further. The price spiral accelerates. In a fairy tale version of the story, a 6 foot 7 inch giant slays the inflation dragon. In the nightmare version, the dragon eats the princess, the castle, the rest of the country, and the continent.

Commodities are the best performing asset class in an inflationary environment because they benefit directly from it. Higher labor and capital costs lead to lower supply at the same time as the demand explodes. The same dynamic doesn’t work for stocks and real estate. High interest rates reduce the present value of future rents and profits: house and stock prices lag inflation.

With US prices surging at a rate not seen in decades and the Fed reluctant to act decisively, we’re gearing up for one helluva ride in commodities. The last 9 months were just a forewarning of what is coming.

Footnote: Why do I use the Bloomberg Commodity Index instead of the better known Goldman Sachs Commodity Index (GSCI)? Simple reason. The GSCI index suffers from an outsize exposure to the energy sector, with 62% weighting to oil and related commodities (gasoline, diesel fuel, heating oil, etc.) The Bloomberg index is much better constructed and gives bigger representation to precious metals and agriculture. Commodities investors’ portfolios tend to be closer to the Bloomberg index than to the GSCI.