Talk Your Book: Why Commodities Are Working - Animal Spirits Podcast Recap

Podcast: Animal Spirits Podcast

Published: 2026-02-16

Duration: 36 min

Summary

In this episode, Michael Batnick and Ben Carlson delve into the current state of commodities investing, emphasizing the importance of trend following and momentum strategies. They also engage with Greg Scher, a managing director at Pimco, to discuss their innovative approach to actively managing commodity investments.

What Happened

The episode kicks off with Michael and Ben discussing their long-held belief that commodities are more suited for trend following rather than traditional investing. They highlight the volatile nature of commodities, which can experience significant boom-bust cycles. Michael notes that while there are underlying fundamentals, much of the supply and demand dynamics are influenced by the market behavior of buyers and sellers, leading them to emphasize momentum strategies in commodities.

The conversation transitions into an interview with Greg Scher from Pimco, who explains their approach to the Pimco Commodity Strategy Active ETF. Unlike traditional commodity funds that are often tied to specific indices, this fund takes a 'go-anywhere' approach, allowing for a diverse range of investments including oil, natural gas, and agricultural products. Greg shares insights on how Pimco actively manages the collateral for these investments to enhance returns, and discusses the unique elements of their momentum factor strategy that allows for varying levels of investment depending on market conditions.

As the discussion unfolds, the focus shifts to gold, as both hosts and Greg reflect on its historical performance and current trends. They consider whether the recent surge in gold prices signals a potential downturn, while acknowledging the unique circumstances today compared to past decades. Greg emphasizes the importance of understanding the cyclical nature of commodities and the need for investors to be aware of supply-side dynamics, positioning the conversation as a blend of historical context and forward-looking analysis.

Key Insights

• Commodities are best approached through trend following and momentum strategies due to their inherent volatility.
• Pimco's Commodity Strategy Active ETF allows for a flexible investment approach, not tethered to a specific index.
• Active management of collateral in commodity funds can enhance returns beyond traditional benchmarks.
• The historical performance of gold and its current market dynamics are crucial factors for investors to consider.

Key Questions Answered

What is the Pimco Commodity Strategy Active ETF?

The Pimco Commodity Strategy Active ETF, ticker CM, is designed to provide exposure to a diverse range of commodities, including oil, natural gas, and agricultural products. Unlike traditional commodity funds, this ETF does not adhere to any specific index, allowing it to be more flexible in investment choices. Greg Scher mentions that the fund focuses on identifying the best assets to own based on potential returns, rather than being constrained to a benchmark.

How does trend following apply to commodities?

Michael and Ben discuss that commodities are particularly suited for trend following due to their boom-bust cycles. They argue that while there are fundamentals at play, much of the price action is driven by the behavior of market participants. This makes momentum indicators effective for navigating the often volatile landscape of commodity investing, as the prices can significantly fluctuate in response to market trends.

What is the role of momentum in Pimco's commodity strategy?

Greg Scher explains that Pimco incorporates momentum as a key factor in their commodity strategy. This approach allows them to adjust their investment levels, ranging from as low as 80% to as high as 120% invested based on market conditions. This flexibility aims to de-risk investments during downturns while maximizing exposure during favorable market conditions, optimizing returns relative to traditional benchmarks.

What historical trends should investors consider when looking at gold?

Greg highlights that gold has a complex history, particularly noting its performance from the early 1980s to the early 2000s, where it experienced declines in both nominal and real terms. He stresses that the current environment is different, especially since the financialization of gold with the introduction of ETFs, which democratized access to gold investments. Investors must be aware of the cyclical nature of gold and the factors that differentiate today's market from past periods.

Why is understanding the supply-side dynamics important in commodities?

Understanding supply-side dynamics is essential in commodities as they directly influence pricing and market trends. Greg emphasizes that commodities operate in cycles where supply can significantly affect market behavior. Investors need to be attuned to these changes, as fluctuations in supply can lead to dramatic shifts in prices, making it crucial for effective commodity investment strategies.