Firm CIO & President outlined why he thinks we might be in the upswing of a commodity cycle and why a broader commodity basket can help now
After a two to three year period of consolidation, Tim Pickering believes we are at the upswing of a major commodities cycle. Citing longstanding underinvestment in commodity supply development and infrastructure, as well as emerging demand shocks from the rise of AI, the rise of India, and the green transition, the Founder, President, and CIO of Auspice Capital Advisors says that investors and advisors are beginning to look favourably on this sector once again.
As a commodities manager, Pickering’s positivity may come as expected, but it also comes with a slightly different view of commodity strategy. Pickering argues for a more diversified basket of commodities, peppering the standbys of oil and gas, precious metals, with critical minerals and a more broad basket, including commodities like sugar, cocoa, and canola. He argues that taking a more diversified approach and accessing commodities without the mediation of resource equity exposure can provide stronger diversification and portfolio benefits.
“This is why we are commodity traders, it is the most diverse asset class. Cotton’s not like crude, which is not like coffee, which is not like canola” Pickering says. “These are such diverse opportunities, and even when some of the traditional markets that are more linked to economic growth factors have a headwind, there is almost always something else going on in commodities. We’ve had so many unique opportunities in the last few years, like sugar, coffee, cocoa, and even nickel. There’s more differentiation within commodities, and that’s why we look broadly at the most diverse asset class.”
Diversified commodities, Pickering argues, can also help hedge against different global growth trends. As the US and other developed economies appear to be slowing or stagnating, Pickering notes that commodities can retain exposure to certain other global growth trends. Energy is one obvious angle, but so is livestock and meat products as growing global middle classes add more animal products to their diets. Commodities like steel rebar, which Pickering says is only accessible via the challenging Chinese market, are hugely in-demand as urban construction continues worldwide.
At Auspice, Pickering explains, the team uses futures contracts to access commodities directly. He notes that these instruments are liquid and eliminate credit risk allowing the team to access price action alone. While Canadian investors particularly often use resource equities as a means of accessing commodity themes, Pickering notes that the utility of commodities is in their differentiation from equity markets. Resource equities, he says, tend to have a high beta to broad equity performance.
“When you buy an oil company you buy a lot of other things that make it behave like other energy stocks or even like the whole stock market,” Pickering says. Further, when you move beyond energy, markets like sugar, orange juice, carbon, cotton, coffee, lead, and tin – these markets don’t really care about interest rates, the Fed, or what the US President does. They are mostly driven by local or global supply and demand.”
While investors should use broad commodities to hedge against inflation, most do it largely by buying gold. Pickering highlights that gold has proven to be a poor inflation hedge, having been one of the worst performing commodities during the inflation surge from 2020 to 2022.
“Gold did well during the recent period of disinflation in 2023 and 2024, when CPI moderated, and other growth type assets such as equities and crypto also did well,” Pickering says. “It can be a great diversifier, but it has not proven to be a reliable inflation hedge.”
What does he have his eye on today? Natural Gas, he says, is trading cheaper in North America than it is in the rest of the world. Uranium is also going to be an important source of energy. Other metals like cobalt, copper, lithium, and aluminium — he says — may only become more important in future. He sees demand for grain and canola growing and argues that a broad allocation that spans sectors – soft commodities, grains, energies, metals, and even meats – is the best way to benefit from the opportunity.
Despite his bullish outlook, Pickering acknowledges that there are risks in the commodities space. One is if we see a broad global economic slowdown, which will likely dampen demand for some core commodities. “You need to manage risk. In other asset classes such as equities, passive beta is good. But in commodities there is significant volatility and downside – you need to be agile and disciplined or you can get run over,” Pickering says.
He also highlights the risk of concentration in commodity portfolios. Too much exposure to oil and gold, he says, can leave investors ‘trapped’ and unable to access the next jump in commodity prices.
“We trade approximately 50 commodity markets, and many can provide unique opportunities,” he explains. “This year gold has had momentum, in 2024 it was cocoa, 2023 it was sugar, and then you have periods like 2020-2022 where almost all commodities except gold did well.”
As advisors look at equity strategies and their potential now, Pickering says that they should expect a different return profile from commodities. Equities, he notes, tend to climb steadily day after day, with sudden sharp corrections downwards. Commodities, conversely, can consolidate for long periods, before a price shock sends them shooting upwards. They are often low volatility until a sudden moment when volatility hits to the upside, the opposite of equities. Holding a broadly diversified basket of commodities, he argues, can give advisors access to those price jumps when they happen.
“It takes a little bit of a mindset change. You need to find a product that's palatable, and ideally with a long track record in many market environments, good and bad” Pickering says. “Get away from concentration and market beta, you'll get scared.”
