The Economics of Commodity Markets

Part II

Commodities and the Business Cycle

From 2008 to 2011, commodity markets experienced growing attention from the banking industry for various reasons. First, the oil bubble that collapsed with the start of the financial crisis in September 2008 drew the attention of market participants to the energy sector. After this episode, the price of gold started to surge and reached all-time highs. The economic recovery observed from February 2009 until January 2010 – that has been fueled by the joint stimulation of various central banks around the world – ended up in a strong increase in agricultural prices, partly explaining the restrictive monetary policy imposed by the Public Bank of China in the subsequent months. Finally, the collapse of the gold bubble at the end of 2011 triggered various analyses of the relationship between commodity prices and the cyclical ups and downs of worldwide economic activity. If these recent events suggest that commodity markets are strongly related to the business cycle, this evidence nevertheless goes against the widespread intuition that commodity markets are a strong source of diversification in a standard cash-bond-equity portfolio.

Table II.1 presents the correlations between a subset of commodity returns and three classical investment vehicles for asset allocation funds: the S&P 500, the Russell 3000, and the returns on a US government bond index. These computations are performed for two different samples: while the long-term correlations ...