Why Commodities Now?
"Fully collateralized commodity futures have historically offered the same return and Sharpe ratio as equities. While the risk premium on commodity futures is essentially the same as equities, commodity futures returns are negatively correlated with equity returns and bond returns...and positively correlated with inflation, unexpected inflation, and changes in the expected inflation rate."
Yale International Center for Finance, 2004 more
- In 2005, world production of key commodities was estimated at above U.S. $1.5 trillion.
- Commodities are tangible and liquid assets, offering different asset characteristics than intangible assets: no credit risk, no ongoing revenue stream valuation, assessable global economic value, primarily U.S. dollar denominated.
- Simply stated–worldwide demand is exceeding supply–and leading to increased prices for energy, metals and agricultural products.
- Commodities and raw materials are the building blocks of civilizations, the lifeblood of our day to day lives, from wheat to petroleum; they influence a significant portion of global economics.
After a long period of decline and investor inattention, commodities are properly gaining attention as an asset class that offers a range of investment opportunities not afforded by financial assets, such as stocks and bonds.
In the twentieth century, there were three major bull markets in commodities – 1906 – 1920, 1933 – 1949 and 1968 – 1982. Each bull market lasted no less than 14 years.
In 2002, a new bull market in commodities began; driven by growth oriented developed economies, and a voracious appetite for raw materials from rapidly emerging economies in Asia, Latin America, Eastern Europe and parts of Africa.
Investors revived interest in commodities has led them to rely on new academic research instead of hearsay about the supposed demerits of investing in commodities.
This new objectivity has revealed the prospective returns and portfolio diversification opportunities which commodities provide. Moreover, it is now widely accepted that commodities display a low, even a negative, correlation to other asset classes, while offering the kind of hedge against inflation which few other liquid asset types can.
