Wednesday, March 24, 2010

Long-term trend of commodity prices

I post this at the request of a reader curious to compare the performance of commodity prices and real estate prices in the inflationary 1970s. It should be no surprise to learn that both increased tremendously during that time. Also of interest should be the period from 1980-2004, when commodities were in a flat trend and inflation was low.


Milo Minderbinder said...

After adjusting for inflation, what are the long-term trends? I've always thought that the inflation-adjusted price for virtually any commodity trends down over time. Recall for example the infamous Simon-Ehrlich bet in the 90s.

Scott Grannis said...

In real terms commodity prices tend to rise during times of high inflation, and fall in times of low and stable inflation.

In real terms, the CRB Spot index fell about 50% from 1970 to 2003; it fell about 70% from 1975 (the peak) to 2003. It has risen about 60% from 2003 to today.

Benjamin Cole said...

At the risk of blowing one note, does not the chart start to look funny in recent years? Especially after 2005? More speculative perhaps?

Has the global monetary supply ramped up that much? Does anyone even know what is the global monetary supply?

Can we compare global money supply in earlier periods to the current period, or the 2005 to 2008 period? My guess is that we are flying blind...we don't really have good numbers. And we can argue over M3 or M2, and other countries even have M4 and something called "M0" No, I don't know what it means.

I gotta say, this is a strange period. I could make a good case that housing will get cheaper for years, same with commercial real estate. Labor is dead. I think oil will become softer and softer--too much supply, and competition from natural gas.

So inflation? Yet the monetarists are going bonkers.

Wait and see. Rememebr--Beverly Hills undeveloped real estate has collaped in value by three-quarters in the last two years.


John said...

Well Ben you have a decent case for low inflation - for a while yet. Housing is still a mess and commercal real estate is certainly weak for the most part and the Greek debt troubles don't help. Portugal's debt downgrade and Spain's private banking balance sheet mysteries compound the worries. Lots of stuff out there to scare money looking for a decent return. Yet, yet, bond king Bill G has just said he prefers stocks to bonds - huh?? King Bill G? STOCKS? What's he smoking? I also just read that big time short seller Dougie K has admitted he has been WRONG (gasp!) about his recent prognostications. He's turning bullish on stocks! My O my what's going on??

Well, for one thing (and I think its a biggie) the Fed is the bull's friend - for now at least. Cash is proverbial trash. It earns nothing - nada - no return for bunker dwellers. Even those brave souls who venture out two or three years are rewarded a paltry sum. CD's? Thin gruel. No meat. Not even for three or four years. What's a yield starved investor to do? AHHA! Yon low grade bond market bekons with juicy yields. Yet, prices have soared in recent months. Am I late? Hmmmmm... What about utility stocks? Not much appreciation there - and the dividends are decent. What about consumer staples? Kraft, Procter and Gamble,McDonalds, decent names all and sporting reasonable dividends with increases highly probable in the near future. What about Johnson and Johnson, Abbott, Merck, Baxter and Teva? Hiding in plain sight? In techland there is Intel, Qualcomm, Microsoft, Hewlett Packard all with reasonable dividends and growth to boot assuming the world as we know it doesn't end. Uncle Ben sez rates will stay low for 'an extended period of time' which means no changes to the returns paid to bunker dwellers for the forseeable future. So for the time being Uncle Ben is our friend. The best friend an investor can have. Don't you think??

puffer said...

Thanks for posting the longer duration chart. But this does not make a lot of sense to me...when you compare the long term trend in housing prices to commodity prices, there is virtually NO correlation. Between 1970 and 2000, nominal housing prices increased at roughly the same rate regardless of inflation/commodity prices. Doesn't this suggest that there other, more significant, factors at work in the housing market?

Scott Grannis said...

puffer: I don't know why you would expect a strong correlation between housing and commodities. Those markets are VERY different from each other in all but one respect: they both deal with physical (tangible) things, and tangible things tend to go up over time by the rate of inflation. But changing inflation expectations and changing monetary conditions can skew things for years at a time. Also, technology can make the extraction of commodities cheaper, and thus lower the real price, whereas housing tends to rise more than inflation because it is driven by real incomes, which usually rise.

Benjamin Cole said...


My hope is this: Eventually there is so much cash out there on the sidelines, and eventually there are a few good jobs reports in a row, meaning that investors start investing, then confidence builds, and we get a sustained, perhaps even secular bull market.

I like your writing--"cash is trash," etc.

I would like Scott to answer about the global money supply--if commodities are a global market, then is not the global money supply important, and not just the US money supply? And what is the global money supply--I have tried some research, but all I get are gold-bug websites. Some are written for the tin-foil hat crowd.

And one last negative--I just see no hope for a balanced federal budget. Yes, Obamacare is another bad federal outlay--but it is dwarfed by defense spending, and a deficit dollar is a deficit dollar.

About 70 percent of federal income taxes are eaten up by the Defense Department, USDA, VA, Interior, Homeland Security and debt. (The huge entitlement programs are largely financed by payroll taxes, not income taxes).

Look at those programs I mention--no one wants to cut them, especially in the R-Party. And they think they wear halos.

And, we have a Congress in which every member wants more spending in their district, but lower taxes.

I guess some good news is that worker productivity keeps going up, and that is a basic building block of income and wealth.

But really, look to Asia. I see a sustained boom in the Far East for generations.

Andy said...

Scott, one interesting question is how to invest in commodities. If you look into the source of return in the major commodity indices, a big component is the "roll return" of rolling futures contracts. In the past, during periods of shortage, the front month contract frequently traded at a premium (backwardation to the experts) and there was a positive impact from rolling. With the inflow of institutional monies into this asset class, it's no longer the case - in fact it might now be a negative return. As your chart has shown, other than inflationary spikes once a generation, spot commodities are a lousy investment. And there's no way to efficiently own most of them outside of the futures market.

John said...

Andy -

May I make a humble suggestion? For a long term commodity play take a look at BHP Billiton (BHP - NYSE). If you seek commodity exposure you have it with bhp in spades. Oil, gas, copper, iron, gold, virtually all of it. Its a stock so there is not the bang for the buck you might get with a futures contract but if you think commodities prices are going higher but don't know when this might be a place to look. Also check out Vale (vale- nyse) the Brazilian iron ore miner that has large Chinese contracts. Also Freeport McMoran (fcx-nyse) the copper and gold miner. Lots of ways to play commodities out there. Be careful.

Scott Grannis said...

Andy: John has some good suggestions. It's not easy for an individual to invest in commodities, unless you can find a fund that does it for you using futures. And if commodity futures are not priced cheaply (e.g., if prices aren't backwardated as you suggest), then making money on commodities as an asset class is difficult even for the pros. In any event, investing in commodities is a speculative activity for most folks, so caution is warranted.

Scott Grannis said...

Re: global money supply. Don't waste your time trying to figure out what it is and what it's doing. Just observe how gold and commodities are behaving relative to the major currencies, and that will give you at least some idea of whether global monetary policy is too tight or too easy.

Scott Grannis said...

Re: global money supply. Don't waste your time trying to figure out what it is and what it's doing. Just observe how gold and commodities are behaving relative to the major currencies, and that will give you at least some idea of whether global monetary policy is too tight or too easy.