Commodity Investing: Maximizing Returns through Fundamental Analysis

CHAPTER 2

Commodity Futures as Investments

Are commodities good investments?¹ Investors have poured billions and billions of dollars into commodities believing the answer to this question to be “Yes!” Have commodity investments done well historically? Even when they are not good investments, perhaps commodities can offer insurance; doing well when inflation is high or when there is a stock market crash or some other wealth destroying event. Assuming one decides to invest in commodities, how does one actually do it? Should an investor buy a silo of grain, individual commodity futures, an investable index, or can an investor do better by buying stocks that offer exposure to the commodities of interest? These are the questions of interest in this chapter. We will address these issues primarily from a quantitative and historical perspective, relying heavily on analysis of historical data.

This chapter will consider commodity investments primarily from a passive, long-only standpoint. The interesting questions of whether commodity returns are forecastable and whether dynamic trading strategies can be constructed is left for a later chapter. The specific investment vehicles an investor may wish to consider, such as the S&P GSCI Index or a trend-following CTA, are also presented in a later chapter.

What makes something a good investment? The most basic consideration is whether it earns a positive return. If you put money in, do you expect to end up with more money than when you started? ...