Inflation-obsessed investors can't get enough of commodities

Investors are pumping more money into commodity funds than at any time in the last decade, enticed by red-hot inflation and a futures market offering big profits.

Investors are pumping more money into commodity funds than at any time in the last decade, enticed by red-hot inflation and a futures market offering big profits.

Tight supplies of everything from aluminum to oil to grains have sent raw-material prices to a record, while also pushing markets into backwardation, where near-term supplies fetch a premium. That’s allowing investors to book returns by selling spot contracts and buying later-dated ones at lower prices.

Cash has flooded into commodities as fund managers seize that opportunity and seek a hedge against the fastest spike in consumer prices in decades. Citigroup Inc. estimates retail and institutional money in the sector at close to US$700 billion, the most since at least 2007. That may also be further fueling the rally.

The huge inflows come as inflation and interest-rate bets roil wider markets, and mark a turnaround for index-tracking funds that proved notoriously unprofitable when the last commodities boom turned to bust in the 2010s. Back then, weaker demand and more supply saw many spot prices move into big discounts, leaving investors exposed to losses when rolling contracts forward.

Backwardation is “a huge tailwind to the investor mindset,” said Jason Bloom, head of fixed income and alternatives ETF strategy at Invesco, which has seen US$1.8 billion pile into its biggest cross-commodity exchange-traded products this year. “People for the first time in 14 years have come to the idea of ‘Holy cow, inflation is a problem.’”