Gold Income Strategies, Commodity Diversification, and Energy ETFs

The dollar is generally got a negative correlation to commodities because commodities are priced in dollars. You can almost think of it as an exchange rate. It creates more demand for commodities priced in dollars when the dollar is lower, so that has aided commodities as well.

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Investors, along with financial advisors and their clients, face many challenges these days, and this includes, of course, keeping pace with inflation, positioning important mega trends like electrification, and generating steady income. Well, here to discuss all of that and more is John Love, CEO at USCF Investments. John, hi, welcome to the show.

Hi, Stephanie, thanks for having me.

So, let's talk about gold. It has been a top performer. It is hovering near record highs. The USCF gold strategy plus income ETF, and your ticker there is USG, has been a beneficiary of gold's rise. USG offers a differentiated approach by combining gold exposure with income generation. Tell us about USG's unique gold income strategy and how the fund might fit into a diversified portfolio.

Sure. Well, there are really two things that differentiate it. One is, most of the gold ETF investments that are out there are just pure long exposure to gold, which is great if that's what you're looking for. When gold is going up, that's a wonderful thing to hold. But the one thing that it doesn't do is produce income. Most gold strategies, whether it's gold futures or physical gold bars, you're not going to get dividends out of that.

So we actually invest part of our assets in options on top of our gold futures positions, which allows us to generate income in most months. Occasionally, option strategies can go against you, but on average, and looking back in time, that generates income which we then distribute on a quarterly basis. So one thing is, you know, right in the name, as you mentioned, is the dividend income. So for investors looking for a little income along with their gold, that's one option.

The second thing it does is when gold is really on a tear, we'll probably underperform just because gold is going straight up and we are selling options on that, and that can lose maybe a little bit relative to gold. But that's if it's a really strong up move over a short period of time. If gold is steadily climbing, then those options should produce some income on top of the gold investment.

But it is at all-time highs, as you mentioned. And when people become concerned about that, what happens if gold goes sideways, the strategy should keep producing some income that'll offset either that sideways market or any declines that materialize. So as investors want to keep their exposure to gold, but maybe continue to earn income and maybe mitigate against a little bit of drawdown, this might be a strategy to consider.

Yeah, definitely gives some flexibility there. Okay, so moving over to commodities as a group. Commodities continue to be top performers this year, beating stocks, bonds, and global real estate. It's also lifted the performance of the USCF Summer Haven Dynamic Commodity Strategy ETF, no K1 Fund, and that ticker is SDCI. So the fund has also garnered an impressive five-star rating from Morningstar. And what has been driving SDCI's gains and what type of investor might SDCI appeal to?

A couple of things. One, you know, commodities over from 2000 from the financial crisis really, or 2010 to 2020, was a tough time for commodities. There were some standouts, but you know, commodities sometimes have different cycles. Since 2020, a couple things have been going on. One, there's just individual stories within commodity baskets, such as cocoa last year, that people don't think about.

When people think about commodities, they think about crude oil and maybe coffee, but they don't think about or copper, I mean, but they don't think about these smaller commodities, and there's a lot of supply demand individual stories there, and that drives commodities. But also as a whole, a couple other things, inflation has been higher than it was in the past, and in addition to that, the US Dollar has also been a major factor.

The dollar is generally got a negative correlation to commodities because commodities are priced in dollars. You can almost think of it as an exchange rate that creates more demand for commodities priced in dollars when the dollar is lower. So that has aided commodities as well. And then there's a shortage of some things relative to need, and that continues to be the case.

So that's driving commodities in terms of who SDCI might appeal to. I mean, obviously, you have to look at it whether it's suitable for your portfolio by yourself or with your financial advisor, but I think it's worth being considered at least for two reasons. One, it provides diversification from stocks and bonds, and people are really looking for that right now. We're getting more calls than we ever have because people are looking for an alternative to stocks and bonds with stocks being so elevated and interest rates being where they are.

And looking at 2022 when both stocks and bonds declined simultaneously, people recognize that maybe some other forms of diversification are beneficial. On top of that, commodities, people tend to look at commodities and think, "Oh, they're risky. They're very volatile." But they over the long term, a basket, a commodity basket tends to have risk about equal to stocks. So it's not necessarily as risky as people think.

Individual commodities, yes, just like an individual stock. Something happens to a company, something happens to a commodity, you can have big, big changes in the commodity price. But as a basket, we tend to see volatility that's comparable to stock indices over time.

So as the global economy undergoes electrification, the infrastructure necessary to produce and store energy will require substantial amounts of certain metals, and that has put ETFs linked to copper like CPER and CPXR in the spotlight. So despite recent volatility in the copper market, what is the outlook for copper?

Yeah, copper, very interesting one because you have traditional uses for copper. It's traditionally been pretty correlated with the market cycle. It's been called doctor copper because it can kind of indicate what's going on with the business cycle. But now not only do you have more copper needed for traditional things like infrastructure, manufacturing, and those kind of things around the world, but you have new demands from AI and even without AI, data center buildouts and all of these things and electrification as you mentioned.

And so there's this growing demand for copper. Meanwhile, there has not been enough copper supply brought into the market over the last 10 to 15 years. And it takes a long time to bring new supply into the market. So a couple weeks ago there was a big correction in US copper prices. There was a premium relative to overseas prices of copper. Prices dropped by about 25%, but back up a little bit from there.

But the key thing is that that's really potentially created a good entry point. The demand story for copper and the supply pending supply shortage has not changed. So I think the fundamentals are still in place. A downturn in the economy, the global economy can impact copper and lower prices for a bit. But we think long term over the next few years and even beyond, copper demand is going to exceed supply and it may do so by a wide margin.

So natural gas, let's talk about that. It is poised to play a critical role in the future of energy production, especially with the global transition towards lower carbon solutions. USCF Investments offers natural gas exposure via the United States 12-month natural gas fund, and that ticker there is UNL, and the United States Natural Gas Fund, which is just the UNNG. How do these ETFs work and what is the outlook for natural gas?

So UNNG invests in the front future contract. The front month future is exposed to the most extreme price moves up and down just because it's nearest to the spot contract. Whereas contracts further out on the futures curve tend to move a little less when there's a big shock positive or negative to natural gas prices. UNL owns the entire the first 12 months in the future strip. So it tends to potentially mitigate some of that volatility.

But more importantly, copper or sorry, natural gas tends to be a commodity that is in what's called contango, and that creates something you may have heard of called a negative roll yield. That can just be a headwind against your return. So UNL when that condition is in place can mitigate that potential negative row yield, doesn't guarantee a positive return, and being in the front month even in a state of contango doesn't mean you're going to have a negative return, but that is kind of a persistent thing in natural gas markets.

So UNL is designed to try to mitigate that somewhat. The outlook for natural gas, that's an interesting one because we are starting to, well, or we have started to import considerably more liquid natural gas than we have in the past, but at the moment it is still very much a US commodity. There are overseas contracts, but in UNG and UNL we are buying the US contract.

And so it's very much driven by US supply and demand. That means whether events like Gulf Coast hurricanes that take supply offline or interrupt shipping of liquid natural gas can really impact the market. So, it's really driven by domestic production. We are running below the sort of the highs over the last five years that we hit last year, but we're above the five years average.

So, right now, natural gas started off the year great. It was up over 40%. It's now down over 20% year to date. That has a lot to do with weather and just the amount of natural gas and storage, but over the long term again, as you mentioned, it's very vital, so I think that's a product that investors are looking at it, that's where you want to have probably a shorter term view, a tactical use that as a tactical tool as opposed to necessarily something you just buy and hold, and if you did want a longer period and the market's in contango, UNL is probably going to mitigate some of those headwinds that you face when contain goes in place.

Yeah. And it's interesting to see how your ETFs work with these different strategies, and also as you said, I mean natural gas isn't going anywhere. I mean it is a vital commodity and it will continue to be with us. Right.

Exactly. It's just something that can be volatile, but it is vital and the more you know we're discovering that you know we need more power than ever and AI is just adding to that. So there's just a need for all kinds of fuels and policy will dictate what those fuels turn out to predominantly be, but natural gas we think will play a part for quite some time.

So, your firm has launched a new Substack blog dedicated to commodities investing with insights, strategy breakdowns, and market commentary. There was a recent insightful post about the dynamics behind what influences crude oil prices. Can you talk about that or anything else you find interesting on the blog?

Crude oil. Well, first of all, thanks for noticing that and you know, we're excited to have that out there and we're hoping to expand that over time and get more out there to help investors. But the crude oil piece that you mentioned just as I talked about natural gas being driven by domestic factors, crude oil, there are also contracts around the world and they can be a little bit regionally focused, but crude oil is driven by global factors, so geopolitics plays a part, overall supply demand pays plays a part.

Over the last 15 years there's been this tension between OPEC actions and US development. We've become the number the world's number one oil producing nation. But OPEC still has tremendous power as a cartel. They have supported prices for the last 5 years by keeping their production capped. But they have recently introduced crude oil back or production back into the market.

They're taking off voluntary quotas and cuts and that probably will have that's going to put some pressure on prices for a while. The energy various energy agencies are expecting a glut of crude relative to demand next year. So if more demand than expected materializes that could be beneficial for crude. Geopolitical events if they get worse can be beneficial for crude.

On the flip side you have just again the global economy, crude tends to be a little bit synchronized a little more synchronized than some commodities with the business cycle. If you have a recession people are buying less and so less is being shipped less is being used for production of goods and services. So those are some of the things that drive energy and just like I said with natural gas you know when it comes to crude oil it's a single commodity.

So you have the potential for more volatility than you have with a broad commodity basket. So I'd kind of view that as a more tactical tool and view broad commodities as something that can benefit investors for diversification.

So many factors and this is why we need you John and your firm.

Oh, thank you.

We also want to let our viewers know that they can check out USCF Investments Substack blog. Just hit the link in the description section below. John Love, thank you so much for joining us. It has been a pleasure to speak with you.

Thanks very much. Thank you again. Take care.

And that does it for today's episode of Spotlight. If you enjoyed the show, please let us know in the comments section below and by hitting the subscribe button. To learn more about the investment strategies and ETF information that we talked about on today's program, be sure to visit uscfinvestments.com. I'm Stephanie Stanton with ETFU. Thank you so much for watching. We will see you next time.