It’s been a long time since an article about commodities felt like ‘click bait.’ After all, commodity indices have been generally declining for about seven years – although 2016 saw a small advance – and the Bloomberg Commodity Index today sits 63% below its all-time high set in the summer of 2008. I’ve written before, quite a bit, about this absurdity of the market, represented in the following chart comparing one real asset (equities) to another real asset (commodities). The commodity index here is the Bloomberg spot index, so it does not include the drag (boost) from contango (backwardation).

This is the fair comparison for a forward-looking analysis. Some places you will see the commodity index plotted against the S&P, as below. Such a chart makes the correct inference about the historic returns to these two markets; the prior chart makes a more poignant point about the current pricing of stocks versus commodities.

There’s nothing that says these two markets should move in lock-step as they did from 2003-2007, but they ought to at least behave similarly, one would think. So it is hard to escape the reasoning that commodities are currently very cheap to equities, as one risk-asset to another.

Furthermore, commodity indices offer inflation protection. Here are the correlations between the GSCI and headline inflation, core inflation, and the change in those measures, since 1970 and 1987 respectively.

Stocks? Not so much!

So, commodities look relatively cheap…or, anyway, they’re relatively cheaper, having gone down for 7 years while stocks went higher for 7 years. And they give inflation protection, while stocks give inflation un-protection. So what’s not to like? How about performance! The last decade has been incredibly rough for commodities index investors. However, this is abnormal. In a watershed paper in 2006 called Facts and Fantasies about Commodity Futures, Gorton and Rouwenhorst illustrated that, historically, equities and commodity futures have essentially equivalent monthly returns and risks over the period from 1959-2004.