Talk Your Book: Why Commodities Are Working

What It Covers

Greg Sharenow from PIMCO discusses the PIMCO Commodity Strategy Active ETF (CMDT), explaining why commodities have outperformed most asset classes over the past six years. The conversation covers momentum-based commodity investing, gold's 22% annual returns in the 2020s, central bank buying patterns, and how AI infrastructure buildout plus deglobalization trends create sustained demand for real assets.

Key Questions Answered

• •Active Commodity Management: PIMCO takes 500-600 basis points of tracking error versus the Bloomberg Commodity Index, using five distinct factors including momentum (20-25% of deviation), carry optimization, behavioral skew analysis, and curve positioning. The fund can range from 80% to 120% invested based on market conditions, actively managing collateral through PIMCO's fixed income expertise to enhance returns beyond basic SOFR rates.
• •Central Bank Gold Demand: Central banks shifted to aggressive gold buying after 2022 when the US and Europe froze Russian assets, viewing gold as protection against confiscation risk. This represents a structural change in reserve management, with emerging market countries diversifying away from vulnerability to Western sanctions. Recent months show increased retail participation alongside continued institutional buying, suggesting broadening demand beyond just central banks.
• •Supply-Demand Imbalance Setup: Current commodity fundamentals mirror the 2000s supercycle, with inadequate supply-side investment facing multiple demand pillars: AI infrastructure (highly energy-intensive), energy transition buildout (commodity-intensive despite eventual cheaper molecules), military-industrial CapEx increases, and strategic stockpiling by nations building supply chain resilience. Companies prioritize free cash flow over growth CapEx, constraining future supply while demand accelerates.
• •Bifurcated Oil Markets: Sanctions on Russia and Iran create two separate oil markets - Western-acceptable supply and sanctioned supply. Russian oil inventories have built up 40-50 million barrels on water that cannot reach Western markets, supporting prices despite OPEC production increases. This geopolitical fragmentation means traders now focus on specific oil types in specific locations rather than a unified global market.
• •Inflation Hedge Performance: Commodities delivered textbook inflation hedge performance during the 2020s inflation surge, outperforming the S&P 500 ex-Magnificent Seven while providing portfolio liquidity that real estate and infrastructure investments lacked. Gold matched Magnificent Seven returns. The 2022 period demonstrated commodities' unique ability to protect portfolios during simultaneous stock and bond declines while maintaining daily liquidity for rebalancing.