(Kitco News) –
It makes sense to hold some commodities in a diversified portfolio in this late stage of a business cycle, according to one commodity fund manager.
In an interview with Kitco News John Love, president and CEO of USCF said that he sees positive long-term prospects for broad commodities, as equity markets appear to be reaching their pinnacle.
“We’ve had a tremendous bull market, but the question is, can it last,” he said. “This is when you want to be holding some commodities because of their low correlation to stocks.”
Love added that higher inflation pressures also make commodity assets more attractive. The CEO’s comments come as the Federal Reserve, following its monetary policy decision, said that it sees inflation rising 2.1% in 2018.
“As inflation starts to rise that is when you will see commodities start to shine,” he added.
As to what commodities have the most potential, Love said that in an environment of continued global growth and rising inflation expectations, base metals look attractive.
Currently the firm’s broad-commodity index fund, USCI, holds a total of $148.3 million in zinc, nickel and lead futures. Zinc is the fund’s second biggest single allocation at $50.3 million, only behind $51.4 million in cotton.
Love added that base metals are attractive because of a major imbalances in the markets supply and demand fundamentals. Even if demand were to drop because of lower trade due to rising protectionist policies around the world, Love said that he would expect low supplies to continue to support prices in the near-term.
The Fund is also heavily invested in energy markets, with a total of $237.30 million in broad energy futures.
While Love sees potential for a broad-commodity basket, the USCI has little love for gold.
The fund holds only a minimal amount of gold in its portfolio, valued at $47.6 million. According to the fund’s rules it has to have an allocation in all major commodity asset classes.
Personally, Love said he is somewhat surprised that gold prices are not higher considering the current environment of growing geopolitical uncertainty and global trade war.
He added that the scenario where gold would perform well in his fund’s portfolio would be an environment of weak economic growth and high inflation pressures.
“I think if growth were to slow and we saw an increase in stock volatility, then I think gold would be the ‘go-to’ investment,” he said.