The Bank of America Suggests Swapping Bonds for Commodities

The strategists of the large US bank Bank of America think that it is worth exchanging bonds for commodities as an investment, because the period of high inflation will continue for many more years.

In the investment world, especially in the US, for decades, many experts have recommended a classic structure for investments, where 60 percent of the money is placed in stocks and 40 percent in fixed income assets (mainly bonds, especially government bonds).

However, strategists at Bank of America, one of the four largest US banks, say that such investment may not be profitable in the 2020s. According to them, it is worthwhile for investors to exchange bonds for raw materials instead, because the long-term price rise of raw materials has only just begun.

According to analysts, high inflation will be long-term, and because of this, commodities will offer better returns (the annual return of gold) than bonds this decade.

“The commodity bull market [bull market] is just getting started,”

said strategists led by Jared Woodard and Michael Hartnett.

“This asset class will outperform bonds in the 2020s.”

Commodity prices have eased after 2022 peaks as markets worry about a possible global economic downturn and a cooling Chinese economy. However, the S&P GSCI index reflecting the prices of raw materials has still increased by 64 percent compared to the bottoms of 2020. This means that the annualised yield of raw materials has been at 10-14 percent this decade.

The Era of High Inflation Has Begun

“The long-term rise in commodity prices is just beginning, as debt levels, national budget deficits, demographics, deglobalisation, artificial intelligence and zero-emissions policies are all inflationary,”

BofA strategists said

Although the pace of inflation has come down compared to the peaks of 2022 in both the US and Europe, BofA strategists expect a new acceleration of inflation, which will be boosted by the aforementioned factors.

They pointed out that inflation used to be around 2 percent in the 2000s and 2010s due to globalisation and technological advances

However, this may soon change, and the 5 percent annual inflation we saw before the 2000s will become normal again.

“A reversal of these trends means that structurally, inflation will return to 5 percent,” Jared Woodward said. The consumer price index rose by 3.4 percent in 2023, and in July, price growth in the US was 2.9 percent year-on-year.

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Commodities Instead of Bonds

All of this means that commodities are a better asset class to allocate 40 percent of assets that are typically invested in bonds.

Although the prices of raw materials as a whole have moved down by about one percent this year, precious metals have shown a very good performance this year. The price of gold is up about 21 percent this year and is up 35 percent since the start of 2022. It was at the beginning of 2022 that the pace of inflation gained momentum.

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Tavex Analyst’s Comment:

There is strong evidence behind the BofA strategists thinking. There is a likelihood that this decade being the decade of commodities, with the price increase likely extending into the 2030s. The high debt levels of many Western countries, Japan and also China will be a big problem in the coming years, which will also have a great impact on the bond market.

There is also a very rapid geopolitical polarisation and the world has begun to deglobalise, which is a very inflationary process

In the long term, more and more capital will move from bonds to commodities, because commodities offer the best protection for investors in an inflationary environment.

In my opinion, it is very likely that in the next 12 months there will be some kind of economic depression or crisis in the western world, which may also bring a temporary drop in the prices of raw materials. However, this cannot be confused with the long-term trend of commodities, which is clearly to the upside. This coming drop in commodity prices could provide an extremely good entry point into the market to buy gold, silver, copper, and other commodities, as well as mining stocks.

During economic downturns, raw materials tend to become cheaper, at least temporarily, as we saw both after the crises of 2008 and 2020

Since, in my opinion, cyclically, raw materials have entered a long-term rising cycle, it is extremely likely that the crisis will be followed by a very rapid rise in the prices of raw materials, which will last for years. Adding fuel to the fire is the reaction of the central banks and the government to the next crisis, which is not difficult to predict – this time, too, the governments will let the budgets go even deeper into the red, and the central bank will start new rounds of money printing. Such an environment is very supportive of raw materials.

In my opinion, the post-crisis environment will be very similar to the 1970s, when commodity prices rose enormously – for example, the price of oil rose from $2 to $40 in a decade, the price of gold rose from $35 to more than $800 an ounce in less than a decade.