Like many other assets, commodities have been on something of a journey this year, with parts of the complex seeing never before witnessed pricing.
Gold (and its peers) have much further to run
Inflation has been elusive for much of the year, despite the extreme levels of stimuli injected into the global economy.
However, when you combine central banks' reaction function with governments' propensity to spend, inflation should follow, and we are starting to see signs of it.
As we have remarked before, timing is one of the most difficult parts of investing. Preparation, on the other hand, is straightforward.
The odds of central banks' achieving a "just right" level of inflation to help erode debt levels seems remote, in no small part because it has never been done before.
Therefore, we think the change in asset prices, and therefore asset allocations, will be profound, especially when one thinks of the risk-reduction role government bonds have played for decades and the painful truth that they now cannot achieve this given where yields are.
As was the case when we were prepared for the market sell-off in Q1, we are prepared now, as we do not think inflation will be a few-week blip like we saw in February and March. We believe it will be a protracted affair and an investable mega-theme for those who are prepared.
Investing around this is by no means simple, but commodities have a number of factors going for them.
Firstly, while prices have rallied recently, they still appear depressed when looking over a long period. Given the one-two punch of monetary and fiscal stimuli, commodities are therefore well positioned to enter another positive cycle, for which it appears due.
Furthermore, central banks have repeatedly said they will keep rates low, not only via policy rates but also by holding down yields on long-dated bonds through various forms of yield-curve control.
Therefore, traditional inflation bets targeting a steepening of the yield curve may underperform relative to commodities, since the latter are free from the heavy hands of central banks.
Commodities remain central to our current portfolio construction, and we plan to broaden and deepen the investment theme in the expectation that inflation expectations eventually take root.
Our fund now has more than 25% of the fund invested in gold and silver, rare earths, copper, agriculture and gold and silver equities.
It sounds a lot, but in truth this is us reflecting our view that all fiat currencies are now "bad" and countries are in a race to the bottom in terms of their valuations.
More than that, it also reflects our view that commodities are simply undervalued versus financial assets.
In a world of negative rates, real assets are that much more attractive. And if you factor in a spike in inflation (which we do), then gold, silver and their peers offer one of the best opportunities around now to potentially make returns.
Clark Fenton is manager of the RWC Diversified Return fund