Without doubt, commodities are one of the major investment themes at the beginning of the twenty-first century. Billions of dollars have flown into passive, long-only strategies, and over the past several decades such strategies have done well. But will they do well in the future?
A desirable property of any investment strategy is that it satisfies two criteria: (1) it makes sense, and (2) it has worked historically. Many make the case that (1) is easily satisfied for commodities. The world is producing more and more people and more and more purchasing power, but the Earth contains finite natural resources and thus prices must rise, the argument goes. We put more stock in the counter-argument that commodities are not investment assets, they exist to be consumed and do not naturally produce cash flows by virtue of their possession as stocks and bonds do.
Furthermore, although in some absolute sense the world's resources are finite, it is very difficult to say where the terminus is or how close we are to it. For example, the combination of technology and a well-incentivized population could presumably bring large amounts of additional land into cultivation. Of course, no one knows for sure what lies ahead for commodity prices. They will probably go up over time—inflation tends to be positive so most things do—but whether they will go up in real terms or by enough to compare favorably with other investment alternatives, such as equities, is another matter.