The divergence between commodities and technology stocks has reached a critical juncture, with broad commodity indices posting staggering returns of 200 per cent since October 2020 – significantly outpacing major tech benchmarks. Notably, gold has surged by an impressive 140 per cent over the same period, while petroleum prices have skyrocketed by 81 per cent this year alone.
Despite these exceptional gains, commodities remain woefully underowned by investors, with energy and basic materials sectors accounting for less than six per cent of the S&P 500 – well below their historical average weighting. This disconnect is further exacerbated by the substantial capital inflows into the artificial intelligence (AI) sector, where leading technology companies are projected to spend nearly £630 billion this year, largely on raw materials and energy.
The paradox deepens when considering the enormous demand for resources driven by AI development. The five largest AI compute buyers alone have an estimated energy footprint of nearly four million barrels of oil equivalent per day – a figure that surpasses the consumption levels of many industrialised nations. In effect, investors are funding a massive resource demand shock while simultaneously neglecting direct investment in those very assets.
Adding to the conundrum, Western energy companies are offering highly attractive returns, with firms like ExxonMobil and Shell returning 14-15 pence of free cash flow for every pound of market value. These companies are trading at valuations lower than before the US-Iran conflict, suggesting a market that undervalues present profitability and future demand.
The reluctance to reallocate capital towards commodities is partly attributed to painful memories of the 2010s, when significant capital destruction occurred in energy and metals projects. Furthermore, passive investment vehicles have become increasingly prevalent, allocating capital based on market capitalisation rather than price signals – effectively suppressing value-seeking activity in underpriced assets.