ETF.com: How about QE? Has that helped push a lot of these markets into backwardation?
Gunzberg: The unprecedented quantitative easing has pushed the entire market across all of the asset classes into this risk-on/risk-off mode, where either the quantitative easing works or it doesn’t work.
Now, the way that capital comes into commodities on the long side—like through indexing—is that investors need to feel they’re being paid for the risk to supply insurance to producers.
In this risk-on/risk-off environment, the risk premium wasn’t high enough to incentivize investors to come in to supply the insurance to producers. Without that insurance, the producers hesitate to produce, because to produce and store becomes extremely risky without the ability to get the insurance that they need.
With the reduction of quantitative easing, there has been less of a focus on this bimodal outcome that’s risk-on or risk-off. And the risk-taking ability of investors is coming back. The long-only investors are coming in to supply the long side of the futures contracts, where the producers are going short.
Now, producers can produce again. But investors also have more ability to pick and choose their spots where they think the premiums are worth the risk of putting their money to work.
ETF.com: Does that mean that, in a broader sense, correlations between commodities, as well as between other asset classes, are coming down?
Gunzberg: Exactly. That’s the implication. We’re seeing the correlations between commodities and stocks and bonds fall back to precrisis levels. We’re also seeing correlations between commodities like oil, gold and corn, come back down to precrisis levels, where they were really uncorrelated.
ETF.com: Is there a particular commodity or a basket of commodities that looks more prospective right now?
Gunzberg: Yes. The cold weather has disrupted the entire food supply chain. So, agriculture and livestock have been a place where there is great opportunity. That may or may not hold true through the summer, as it’s determined by how much the soil needs to thaw, crop rotation decisions, crop yields coming out, etc.
There are a lot of opportunities right now in the agriculture space, and different from the opportunities that might be present in energy. There’s a big focus currently on the war potential in Ukraine and Russia. Russia is one of the biggest oil suppliers. What’s going on in North America with the fracking technology and the ongoing energy boom we’re seeing here—there are a lot of different potential supply shocks.
Perhaps two to four years ago, these types of shocks wouldn’t have mattered as much because inventories were so high. But now, they really matter.
ETF.com: The S&P GSCI is one of the most broadly recognized commodities indexes, and it’s pretty heavily focused on energy. Does it make sense to consider an index like that?
Gunzberg: The way that I would view the S&P GSCI is as the most representative beta of the entire commodities landscape, the same way that maybe the S&P 500 is viewed in equities. The reason there’s more energy weight than there is, say, agriculture weight, is because, frankly, in U.S. dollar terms, there is just more energy. Energy has a higher value than corn.
But the benefit of it, and a great benefit of it right now, is that if inflation comes into play—and there has been a rising fear of inflation—the heavy energy focus provides more inflation protection than any single commodity basket with less energy.