Michael Batnick and Ben Carlson host Greg Scher, Managing Director and Portfolio Manager at PIMCO's Real Assets team, to discuss the PIMCO Commodity Strategy Active ETF (CMDT). Scher brings 27 years of commodity experience, including authoring PIMCO's influential Revenge of the Old Economy research in 2000 that predicted the last commodity supercycle.

The conversation explores PIMCO's active approach to commodity investing, which differs from passive index tracking through momentum indicators, carry optimization, and dynamic allocation ranging from 80% to 120% invested. They discuss current market dynamics including gold's central bank buying surge, oil market bifurcation due to sanctions, and how AI infrastructure and energy transition are creating new commodity demand pillars reminiscent of China's early 2000s growth impact.

PIMCO's Active Commodity Strategy Beyond Index Tracking

The CMDT fund is a go-anywhere commodity strategy that can invest in any commodity, not married to any single index, though cognizant of the Bloomberg Commodity Index as a reference point.

"We can be as little as 80% invested and up to 120% invested. The idea being when the markets are souring, hopefully we de-risk them" - Greg, explaining their momentum-based allocation system.

PIMCO actively manages the cash collateral from futures positions to add value, leveraging their fixed income expertise alongside commodity exposure.

The strategy targets 500-600 basis points of tracking error on average, potentially generating 250 basis points of alpha over time on assets with 15-18% volatility.

Gold's Central Bank Buying Surge and Geopolitical Shifts

"The event after 2022, when the US and Europe froze and seized Russian assets, I think was like a pretty big watershed moment for a number of countries" - Greg, on central bank gold buying motivations.

Central banks have been major gold buyers seeking assets that can't be confiscated, though retail participation has increased significantly in recent months with lines outside coin shops globally.

Gold has been one of the best performing asset classes this decade, even competing with the MAG 7 stocks despite the textbook boom-bust nature of commodities.

Central banks likely have price sensitivity and may pull back after major rallies, but their destination is hedging economic and political vulnerabilities long-term.

Oil Market Bifurcation and Sanctions Impact

"We're really seeing a world in which you have two separate markets. You have the market that is acceptable to be delivered into Western Europe. And then you have another set of oil that's not" - Greg.

Russian oil supplies have built up by 40-50 million barrels on water due to sanctions, with Iranian supplies also accumulating, creating artificial scarcity in tradable markets.

The bifurcation means traders aren't trading oil in general but specific types in specific locations, contributing to better oil returns despite OPEC production management.

"For the first time in my career, I can really say after 27 years, this is a unique backdrop" - Greg, describing current oil market dynamics.

New Commodity Supercycle Drivers and AI Infrastructure

Greg references PIMCO's Revenge of the Old Economy papers from 2000 that predicted the last supercycle, noting similar supply-demand imbalances emerging today.

"The demand growth centers, they are AI, which is very commodity intensive, energy transition, very commodity intensive" - Greg, identifying new demand pillars.

Strategic competition is driving supply chain redundancy and stockpiling of critical minerals, creating demand through building resilience rather than immediate consumption.

Companies are spending conservatively on growth capex while multiple demand pillars strengthen, similar to conditions that preceded the 2000s commodity boom.

Portfolio Management and Risk Controls

Momentum strategies comprise 20-25% of the approach, with carry optimization, behavioral factors, and skew analysis making up the remainder of the quantitative strategy.

The fund rebalances weekly with some strategies operating on four-week cycles to avoid overreacting to short-term price movements while maintaining active management.

"If we have a rally like silver, your vols have gone up, your money, your percent of your portfolio has gone up because it's so vastly outperformed that it becomes a much higher risk asset" - Greg.

Risk targets and concentration limits prevent the portfolio from becoming overexposed to parabolic moves, with daily monitoring when necessary to maintain appropriate volatility levels.