Commodity Time Machine - April 2021

After April's 8% commodity rally, one may say commodities are bullish. It might be a good time to see exactly where we, and commodities, stand long-term. 

Bloomberg Commodity Index

The above is the price chart, since inception, for the diversified Bloomberg Excess Return Commodity Index*. April's month-end close is marked as the horizontal line in orange. Despite April's move, with this view we may be far from a long-term break-out bull. Here are the actual numbers:

Above are the continuous compounded annualized returns for the BCOM-ER for the periods shown (as of April 30, 2021). We had a good month and a better year, so far, and a fantastic comp with the Covid lows! (Everyone does!) 

Note that commodities are a time machine where April's closing price was first breached in the early 90s, and repeatedly until the breakout move in 2003. The subsequent fall from 2008's grace brought us back to our current levels in 2015. Since then its been a sideways slog until the pandemic and recovery. 

Commodities had their run from the '90s to 2008, when oil went to $145 a barrel. Since then is a tale of woe, but not for everyone.  The commodity collapse came at the expense of producers but to the fantastic benefit of consumers the world over. 

Technology vs. the People

Commodity markets are always a tug of war between demand and technology. Technology advancements, when they come, leapfrog above prevailing, slow growing, demographic dependent demand. Oversupply happens, prices collapse, and it takes time for demand (and prices) to catch up! Academics who study commodity prices see no real gains, ever! (See The Economist "Oil and commodity prices are where they were 160 years ago".) 

Outlook

Whether or not how long they last, there is a chance this is the start of a bull market. This is what newly hatched bull markets can look like. For that we need doubles in energy (crude oil at $100), ags (beans in the twenties) and metals (gold at $4000)! 

*Why the "Bloomberg Excess Return Index"?   Well first there are really only two major commodity indexes, the Bloomberg and the S&P GSCI. The GSCI is energy dominated. The Bloomberg indexes are diversified and, in my view, more representative of commodities as a whole. Second, the "Excess Return" flavor of the index represents the returns of commodities and only commodities. The headline "Total Return" index versions erroneously, in my view, add the interest earned by traders in their futures accounts. Interest rates are de minimis now but that wasn't always so. There was a time when the interest earned in the total return index was greater than the profit from commodities. 

Note: All returns shown are continuously compounded. 

Disclaimer: Posts are for education only, may be subject to change without notice, and, while prepared with care, may be subject to omissions and errors. Please request to follow this blog by email to gdrahal@gmail.com.

© 2021 George Rahal.