Commodity Investing: Maximizing Returns through Fundamental Analysis

CHAPTER 3

Commodities for the Long Run

In the previous chapter we examined the performance of commodity investments during the past several decades. In this chapter we will explore, as best as we can, the long-term performance of commodities. As with most economic studies that seek to reach far back into history the primary difficulty is the availability and quality of data. Though commodity prices and commodity futures are everywhere today, the salience of commodities in financial markets is a relatively recent development in the history of humanity. True, the Chicago Board of Trade was formed in 1848, but crude oil futures were not introduced until 1983. It is arguably with the introduction of crude oil futures that the modern age of commodity investing began. The S&P GSCI Index, today's most important, was not formed until 1991. In this chapter we will look at two series, the price of wheat and the Economist Commodity Price Index,¹ to get a sense of the long-term performance of commodities. Unlike the last chapter, we will be focusing on the price of physical commodities, instead of futures, as that is what data availability allows.

Why wheat? Wheat is one of humanity's most important foodstuffs. It is the prime ingredient in bread, and bread, of course, is the staff of life. Cereal crops such as wheat have been in continuous use since humans first became farmers 10,000 years ago. In contrast, the commodities humans have used for energy have changed over time. Humans first lived ...