Commodities are a better bet than bonds for the rest of the 2020s, BofA says

• Bank of America predicts that commodities will outperform bonds by the end of the decade.

• A structural rise in inflation could drive demand for commodities such as oil and gold, according to the bank.

• Deglobalization and higher labor costs are reversing trends that have kept inflation low for the past 20 years.

Commodities are the place to be for investors from now until the end of the decade, according to Bank of America.

A structural pick-up in inflation suggests the “commodity bull is just getting started,” 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 hedges against inflation, and investors will demand more of them if Woodard’s forecast of a steep rise in inflation comes to pass.

Noting that inflation has been reduced over the past 20 years to about 2 percent due to trends in globalization and technology, Woodard said it could soon return to inflation trends seen before the 2000s, when prices rose at an average annual rate of approximately 5%.

“The reversal of these forces means a structural shift back to 5 percent,” Woodard said. The consumer price index rose 3.4% in 2023, and July data showed the index growing at an annualized rate of 2.9%.

While it may be difficult to envision a slowdown in the ongoing trend of technological disruption pushing prices lower, deglobalization has increased in recent years.

From U.S. tariffs on Chinese products such as electric vehicles and steel to recovery efforts in America’s semiconductor industry, these policies are a headwind to lower prices, especially as recovery efforts rely on labor that costs considerably more than emerging countries.

Bank of America said commodities could generate annualized returns of 11% “as debt, deficits, demographics, reverse globalization, AI and net zero policies are all inflationary.”

These potential returns mean commodities are a better asset class to allocate 40% of an investor’s 60/40 portfolio, which is typically reserved for bonds.

Woodard pointed out that commodity indexes have generated annualized returns of 10%-14% even amid falling inflation and a supportive Federal Reserve, compared with just 6% for the popular Bloomberg Aggregate bond index.

Gold was a particularly strong force driving the solid performance of the commodities sector. The precious metal is up about 21% this year to record highs and is up 35% since inflation started to pick up in early 2022.

On the other hand, oil prices have not held up very well against gold. The price of WTI crude oil is trading at $74 per barrel, about the same as in August 2021.

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