Commodities move in cycles driven by supply constraints, demand shifts, and macro forces. Understanding where you are in the cycle matters more than any single data point.
Since 2022 the commodity complex has been dominated by a few major themes. Gold has pushed to record highs driven by central bank buying, particularly from China and emerging market central banks diversifying away from dollar reserves. The traditional relationship where gold falls when real interest rates rise has broken down because the buying is structural and sovereign, not speculative. When central banks are accumulating hundreds of tons per year, rate differentials matter less than the desire to hold a reserve asset outside the Western financial system.
Cocoa has been one of the most dramatic moves in commodity history. Prices more than tripled from 2023 levels due to disease and weather devastating crops in West Africa, which produces roughly 70 percent of the global supply. Ghana and Ivory Coast both saw massive production shortfalls. This is a supply shock in a market with minimal inventory buffer. When a soft commodity with concentrated production gets hit by weather, the moves can be vertical because there is no quick way to bring new supply online. Trees take years to mature.
Coffee followed a similar pattern. Drought in Brazil, the world’s largest producer, combined with rising demand from Asia created a supply deficit that sent prices to multi-year highs. Soft commodities are uniquely vulnerable to weather because unlike metals or energy, you cannot drill for more coffee or mine more cocoa. You wait for the next harvest and hope conditions improve.
Oil has been volatile but range-bound relative to the others, caught between OPEC production management on the supply side and slowing Chinese demand growth on the other. OPEC has maintained discipline on cuts, which has supported prices, but the demand picture is more uncertain than at any point in the past decade. The energy transition is not killing oil demand yet but it is changing the growth trajectory enough that the market no longer prices in perpetual demand increases.
The Japanese yen has traded like a commodity proxy since 2022. Japan imports nearly all of its energy and raw materials. When commodity prices rise, Japan’s import bill increases, the trade balance deteriorates, and the yen weakens. The correlation between oil prices and USD/JPY has been one of the most reliable relationships in macro over the past three years. Traders who understood this cross-asset link captured significant moves in both directions.
Bonds have been the mirror image of commodities during this period. Rising inflation driven partly by commodity price increases forced central banks to hike rates aggressively. Bond prices fell as yields rose. The 60/40 portfolio, which relies on bonds offsetting equity losses, failed spectacularly in 2022 because both stocks and bonds sold off together. Commodities were the only major asset class that performed during that drawdown, reinforcing why they belong in a diversified portfolio.
The lesson from every commodity cycle is the same. Supply takes years to respond to price signals. When a commodity spikes because of a supply shock, the high prices eventually incentivize new production, but the lag can be long enough to create sustained trends that last quarters or years. The traders who profit are the ones who identify the supply constraint early, understand how long it will take to resolve, and size their positions accordingly.
