![]() Agricultural commodities depend on harvests we yet have to analyze the impact of the current heatwave on harvests. Well, commodities in the energy sector depend a lot on issues such as the OPEC’s output targets, the prospect of Iran’s oil being allowed into the market, the shift to green energy, and the rising demand for oil as the world recovers from the virus. Therefore, by default, GSG’s total investable assets had similar exposure to these commodity classes. GSG’s PortfolioĪs of June 29, 2021, the S&P GSCI index had assigned the heaviest weights to three constituents: energy (58%), agricultural commodities (18%), and industrial metals (12%). In the long run, prices will revert to their mean. Therefore, I reckon that commodity prices can move up in the short to medium term, but if their price spikes are due to shortages, then price disruptions will last for a brief period. We yet have to restore the jobs and consumer confidence that have been lost and it is not going to be easy. ![]() I believe that though the world will contain COVID-19 by 2022, economic repairs will take some doing. In January 2021, analysts were predicting a commodity supercycle, while today, in a space of just 5 months, they are suggesting that prices may have peaked! Who knows what can happen next! Image Source: My Tweet/The Lead-Lag Report Moreover, analysts believe that high inflation will kill demand and correct prices sooner than later. The current prognosis is that prices will stabilize because China is moving quickly to contain high prices, and harvests in the U.S. (E) Reputed analyst firms like Goldman Sachs published reports in January 2021 that a commodity supercycle is underway with strong structural factors backing it.Ī combination of these factors sent commodity prices raging like wildfire and GSG went on to gain about 55% in the last one year.Ĭommodity prices have eased somewhat in May 2021 after hedge funds cut their positions. (D) The growing clamor for renewable energy and electric vehicles has led to a spike in the prices of copper, aluminum, and silver. As things get back to normal, the demand for goods and services is likely to escalate in the developed part of the world. and Europe are aggressively vaccinating their residents and the situation has started normalizing despite the emergence of a new Coronavirus variant (Delta). (B) China contained COVID-19 more efficiently than other nations and increased its manufacturing activities. (A) COVID-19 disrupted the market, adversely impacted manufacturing and logistics, and created shortages. The sudden and quick rise in commodity prices happened because: So, well, investing in GSG now depends on how commodities are likely to fare in the medium to long term, and here is my take on whether this ETF is investable. ![]() On the one hand, many analysts believe that a commodity supercycle has begun, while on the other hand, some estimate that rising prices will trigger inflationary forces and lead to a fall in demand. Commodity prices and volumes picked up from then on for a variety of reasons. The ETF was launched in 2006 and since then it has had a disappointing run until Q3 2020. Investing in GSG is like investing in the futures contract of a basket of commodities. Its constituents are physical commodities that are liquid and each constituent’s weight is determined by its global production numbers. It evaluates the performance of the commodity market using futures contracts of liquid commodities. The S&P GSCI index is a measure of commodity prices. Note that the ETF does not pay a dividend and investors have to rely on price momentum. The fund’s returns are a combination of the gains delivered by the S&P GSCI Index and the interest that it earns on its Treasury securities. Treasury bills and uses them as collateral for margins required for investment in futures contracts of the S&P GSCI (Goldman Sachs Commodity Index) Total Return Index. The iShares S&P GSCI Commodity-Indexed Trust ETF’s ( NYSEARCA: GSG) modus operandi is simple.
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