Analyzing commodity returns in the last decade and how investors could have earned a real yield
Commodities belong to the alternative investments category, together with private equity, infrastructure, collectibles, and real estate. Some of these alternative investments are characterized by less transparency than traditional investments, and they are typically attractive as a hedge against inflation.
The commodity market spectrum is large enough to accommodate several subcategories: precious metals such as gold and silver, timberland and farmland, energies such as oil and natural gas, and more. Many commodity products are correlated, and (unlike cryptocurrencies) they all have a practical use besides being an investment. Think of gold, which will always have intrinsic value for jewelry and industry, so its value can never fall to zero.
Commodity returns vary from year to year based on factors such as technological changes (which create imbalances in supply and demand) and the rise or fall of the US dollar. Most commodities are denominated in US dollars as the world’s de facto reserve currency.
A Decade of Commodity Returns
The last decade was marked by two economic recessions and a sovereign debt crisis. The 2008-2009 Great Financial Crisis was met with unconventional monetary policies and other extreme measures to fight the recession.
In 2012, the European sovereign debt crisis led to the Euro area economies underperforming America. Finally, the COVID-19 pandemic ended one of the most difficult decades in generations.
A quick look at commodity returns during these years reveals some interesting facts:
First, the crude oil price delivered negative returns in half of the years analyzed. Moreover, it was the worst-performing commodity in three of those years.
Second, gold was relatively stable, delivering positive results in six out of the ten years analyzed.
Third, palladium stands out as the best performing precious metal, especially between 2017 and 2019.
Finally, 2020, the year of the pandemic, saw commodity prices surging. This was mainly but not wholly due to the decline of the US dollar. For example, although the EUR/USD exchange rate declined from 1.25 to 1.06 between 2018 and 2020, some commodities — palladium, corn, wheat, and nickel — delivered positive returns.