- Bank of America predicts commodities will outperform bonds until the end of the decade.
- A structural rise in inflation could drive demand for commodities like oil and gold, according to the bank.
Commodities are the place to be for investors between now and the end of the decade, according to Bank of America.
A structural rise in inflation suggests the "commodity bull is just starting," Bank of America strategists led by Jared Woodard said in a note on Thursday.
Commodities such as oil and gold have long been considered reliable inflation hedges, and investors will demand them more if Woodard's forecast of a steep rise in inflation plays out.
Highlighting that inflation has been subdued over the past 20 years at around 2% because of trends in globalization and technology, Woodard said that it could soon revert to the inflation trends seen before the 2000s when prices rose at an average annual clip of about 5%.
"Reversal of those forces means a structural shift back to 5%," Woodard said. The consumer price index rose 3.4% in 2023, and July data shows the index rising at an annualized rate of 2.9%.
While it may be difficult to imagine a slowdown in the continued trend of technological disruption pressuring prices lower, deglobalization has grown in recent years.
From US tariffs on China products like EVs and steel to restoring efforts by America's semiconductor industry, these policies are a headwind for falling prices, especially as restoring efforts rely on labor that costs considerably more relative to emerging market countries.
Bank of America said commodities could generate annualized returns of 11% "as debt, deficits, demographics, reverse-globalization, AI and net zero policies all inflationary."
Those potential returns mean commodities represent a better asset class to allocate the 40% of an investor's 60/40 portfolio that is typically reserved for bonds.
Woodard highlighted that commodity indexes have generated an annualized return of 10%-14% even amid falling inflation and a dovish Federal Reserve, compared to just a 6% return for the popular Bloomberg Aggregate bond index.
Gold has been a particularly strong force driving the solid performance of the commodities sector. The precious metal has surged about 21% so far this year to record highs, and is up 35% since inflation started to surge at the start of 2022.
On the other hand, the oil prices haven't held up very well relative to gold. The price of WTI crude oil is trading at $74 per barrel, about the same as it was in August 2021.