Follow the Money, Trade the Trend

Commodities have been a forgotten asset class for 99% of investors. Doing a quick search, the average investor dedicates 3-5% of their total portfolio value to commodities. Digging deeper, of that 3-5%, 50-70% of that allocation is represented by gold. But there is a much larger world of commodities available for investment. ETFs have given the retail investor access to an immense amount of products. Here are some:

• GLD: Gold
• SLV: Silver
• CPER: Copper
• UNG: Natural Gas
• USO: Oil
• USCI: Commodity Index
• DBX: Commodity Index

ETFs keep retail investors from having to open futures accounts. This saves them from having to learn about futures expirations, which contract is best to purchase and best of all, keeps them away from using excessive leverage. The average commodity future deals in a leverage ratio of 10 to 1, meaning a 10% correction would completely wipe your equity value, liquidating your position. In this case, the financialization and ease of use benefits the retail investor.

Bringing back the asset allocation discussion, if you’ve been underweight commodities since 2008, this has been an amazing trade. With Large-Cap Technology dominating the weighting of the S&P 500 (SPY), it’s been difficult to generate Alpha via the commodities asset class. But why is this? 

To understand why commodities have been such an underperformer to SPY, you need to understand a basic intermarket relationship, the relationship between commodity prices and the US Dollar. Most commodities are priced in USD globally. When the dollar strengthens, commodities become more expensive for foreign buyers, leading to lower demand and falling commodity prices.

Here’s a chart of the US Dollar and gold from 2000 to now, showing this inverse relationship. Gold is the commodity that historically holds the most inverse relationship to the US Dollar. 

Chart 1.1: US Dollar and Gold’s Inverse Relationship

Selection of the 2000 to now was no accident. It provides an example of two periods, 2000 to 2008: a US Dollar bear market and 2008 to now: a US Dollar bull market. The below monthly chart of the US Dollar clearly shows these two trends. If we’re about to experience another “Commodity Supercycle,” then the US Dollar likely needs to lose support at $98, and head into a downtrend. 

Chart 1.2: US Dollar Bear and Bull Market

Ready to take advantage of the Commodity Supercycle?

With key commodities breaking out and the US Dollar showing signs of weakness, now might be the perfect time to reevaluate your portfolio. Don’t let your investments miss out on potential opportunities in this underappreciated asset class. Stay ahead of the market—start exploring commodity ETFs today to diversify and strengthen your portfolio. In the next section, we’ll take a look at the absolute trend of individual commodities over the last few years.

Absolute Trends

The first step in the “Commodity Supercycle” starts with the US Dollar losing the $100 support level. This will add fuel to commodity outperformance over SPY. Even with the US Dollar oscillating in this two year trading range, commodities have started to rip higher. 

Chart 2.1: Recent US Dollar Price Action

Gold has loved seeing the US Dollar weakness. After trying to break above $2100 for three and a half years, Gold finally completed its base breakout in 2024 and hasn’t looked back since. This week it made another new ATH, closing at $3021.

Chart 2.2: Gold Recent Price Action

Silver is gold’s crazy little brother, often underperforming when gold is in a downtrend and outperforming when gold is in an uptrend. Silver is usually the Beta play to gold. Chart 2.3 shows the recent price action of silver, also breaking out in 2024.

The correlation between silver and gold is very high and this can be seen in Chart 2.4. The quarterly correlation is very high, with only a few brief period of 0 to negative correlation. 

Chart 2.3: Silver Recent Price Action

Chart 2.4: Gold and Silver Correlation

Copper is the third metals chart you’ve seen now, notice any similarities to gold and silver? If you don’t, I’ll point it out for you. Copper is breaking out of a huge base and guess what, Copper closed at ATHs this week. You’re now witnessing the power of commodity allocation. With SPY at 26-weeks lows, you just saw charts of three commodities make new highs. 

Chart 2.5: Copper’s Recent Price Action

Chart 2.6 shows a daily chart of natural gas prices. Natural gas is up 68% since bottoming in November 2024, but during this uptrend it has gone through six corrections of over 10% and is currently 14% off the highs. Natural gas is very volatile and YOU SHOULD NEVER INVEST in natural gas. This is simply a trading vehicle. That’s why a daily chart was used for natural gas, unlike a weekly chart for the three other metals. You can ride the up and downtrends of natural gas, just make sure you don’t overstay your welcome.

Chart 2.6: Natural Gas’ Recent Price Action

Finally, let’s take a look at oil. Compared to the other commodities, this chart is underwhelming. After the huge run from 2020 to 2022, oil has been dead, stuck below the 2022 High VWAP and holding support around $65 a barrel. If you used oil to play the recent weakness in the US Dollar, you massively underperformed gold, silver, copper and natural gas. 

Chart 2.7: Oil’s Recent Price Action

Relative Trends

Now that you’ve seen the absolute performance of five commodities, let’s take a look at their relative performance to SPY. Gold/SPY, Silver/SPY and Copper/SPY all show the recent outperformance of commodities to SPY. But each is at a very important resistance level. Gold/SPY looks the best. After breaking above the red downtrend line, Gold/SPY pressed through the 38.2% Fibonacci retracement level and is floating in no man’s land. Taking the recent uptrend into account, the likelihood this ratio heads to the 61.8% Fibonacci retracement level is high. 

Chart 3.1: Gold/SPY Recent Price Action

Silver/SPY and Copper/SPY likely have a much more difficult time pushing higher. Both are sitting just below resistance levels that have been in play for years. I wouldn’t be surprised if Silver/SPY and Copper/SPY needed to consolidate before breaking higher. 

Chart 3.2: Silver/SPY Recent Price Action

Chart 3.3: Copper/SPY Recent Price Action

Natural Gas/SPY has ripped. The uptrend since November 2024 has been STRONG. But the 2.618 Fibonacci level was recently hit and this ratio has traded sideways since. The uptrend is intact, but a period of consolidation shouldn’t be out of the question. 

Chart 3.4: Natural Gas/SPY Recent Price Action

If the absolute trend is bad, the relative trend is going to be terrible. That’s exactly what you’re seeing in Oil/SPY. This ratio has been rejected by the 2022 High VWAP and keeps making a series of lower highs and lower lows. If an uptrend is going to start, look for this ratio to get above the 0.15 level. 

Chart 3.5: Oil/SPY Recent Price Action

Comparing GLD/SPY to the Previous Bull Run

From 2005 to 2011, Weekly RSI Overbought readings in GLD/SPY brought consolidation before continuing higher. After 2011, Weekly RSI Overbought readings were heavily sold into, sending the ratio to new lows. Last week, GLD/SPY registered a Weekly RSI Overbought reading. 

Does Gold underperformance continue or does an uptrend start?

Not All Commodity ETFs are Created Equal

ETF Construction Analysis

DBC: Fixed Commodity Weighting DBC tracks the DBIQ Optimum Yield Diversified Commodity Index, maintaining a fixed allocation to 14 specific commodities. Energy commodities like crude oil, natural gas, and gasoline often comprise over 50% of its portfolio. This energy-heavy structure allows DBC to benefit disproportionately during periods of rising energy prices.

USCI: Dynamic Commodity Selection USCI tracks the SummerHaven Dynamic Commodity Index (SDCI), selecting 14 commodities each month from a broader pool of 27 based on momentum and backwardation. This dynamic approach results in a more balanced allocation across sectors, providing diversification and reduced volatility. USCI’s focus on commodities in backwardation seeks to optimize roll yields, but this strategy is less effective during periods of contango or when energy prices dominate commodity market returns.

Performance Analysis

DBC’s energy exposure allowed it to capitalize on the sharp recovery in energy prices after the oil crash of 2014-2015 and the post-COVID-19 rebound. In contrast, USCI’s diversified portfolio, while reducing risk, limited its upside potential. Additionally, the sluggish performance of agricultural and industrial metals weighed down USCI’s returns compared to DBC.

DBC’s fixed, energy-heavy allocation positioned it well for energy-driven rallies, while USCI’s adaptive and diversified strategy led to underperformance in an energy-dominated market. Investors seeking energy exposure may prefer DBC, while those prioritizing risk management and broad commodity diversification might favor USCI.

C

Choosing between DBC and USCI hinges on your investment priorities. DBC’s fixed allocation is more suitable for those seeking a straightforward approach with a focus on energy market movements, while USCI’s dynamic selection offers a more flexible, diversified portfolio that can better weather periods of volatility. Understanding these differences will help you align your commodity ETF choice with your specific risk tolerance and market outlook. Consider your long-term strategy and exposure preferences when making this decision.

Conclusion

Commodities present a unique and often overlooked opportunity for portfolio diversification. With ETFs providing easy access to a wide range of commodity investments, retail investors can now participate in a market that was once reserved for more sophisticated strategies. While commodities have recently been an underperforming asset class compared to the S&P 500, shifting market conditions—such as a weakening US Dollar—are sparking the potential for a “Commodity Supercycle.” As key commodities break out, now may be the ideal time to reevaluate your portfolio and consider increasing exposure to commodities. Whether you choose a fixed commodity allocation like DBC or a more dynamic, diversified approach like USCI, understanding the specific strengths and risks of each can help you make an informed decision based on your investment goals and risk tolerance. The potential for returns in commodities is real—don’t let this asset class pass you by.