Investing in Commodities From 2004-2008, And Losing Money

[nutmeg]

In 2006, Gary Gorton and K Geert Rouwenhorst published an influential paper.

The two academics examined 45 years of performance of commodities and found they “work well when they are needed most”: when stock market returns are disappointing.

Professors Gary Gorton, left, and Geert Rouwenhorst highlighted commodities’ diversification benefits.

The paper’s view was embraced en masse by institutional investors and helped to transform commodities from a niche investment into a proper standalone asset class.

But the diversification benefits of commodities have become increasingly tenuous as prices in the years following the report’s publication moved in tandem with other major asset classes, including shares and bonds.

As stock markets plummeted worldwide in 2008, commodities fared just as badly. And last year both bottomed in March, challenging the notion that they respond to different phases of the cycle.

These correlations have proven nasty for investors, such as pension funds, that piled into commodities as a way to broaden portfolios and spread risk. . . .


cont on link...

http://seekingalpha.com/article/190...8-and-losing-money?source=article_lb_articles

 

[garchbrooks]

This could just be a function of the fact that currency market movements are having a greater impact on stocks and commodities than before. What happens to the analysis of commodities vs stocks when they hedge out the currency risk, and by that I mean with some counterweight on the other side of the portfolio looking at fluctuations in the dollar?

I'd argue that if the currency aspect is the dominant factor, the relative performance of commodities to stocks would be immaterial. Once the currency factor is neutralized, perhaps the results make more sense.

 

[intradaybill]

You know what happens to those who listen to economists.

 

[Lethn]

Quote from intradaybill:

You know what happens to those who listen to shills.

fixt

Real ecnomists know what they're talking about and aren't just spreading bullshit in the name of their government or firm.

 

[makloda]

People who expected endless riches with little downside risk from buying and holding commodities because some clowns were pumping them on bubble vision were just as dumb as their peers who expected the same from equities.

 

[nutmeg]

Quote from garchbrooks:

This could just be a function of the fact that currency market movements are having a greater impact on stocks and commodities than before. What happens to the analysis of commodities vs stocks when they hedge out the currency risk, and by that I mean with some counterweight on the other side of the portfolio looking at fluctuations in the dollar?

I'd argue that if the currency aspect is the dominant factor, the relative performance of commodities to stocks would be immaterial. Once the currency factor is neutralized, perhaps the results make more sense.

Thanks for the idea, this makes sense to explore as a definite possibility. Not my area of knowledge but from what I've been reading, seems many topics these days are leading to the subject of currency. If the market "looks forward", very well could be a "there ya go" diagnosis.

 

[rcaldwell]

Quote from makloda:

People who expected endless riches with little downside risk from buying and holding commodities because some clowns were pumping them on bubble vision were just as dumb as their peers who expected the same from equities.

Commodities for the most part are subject to the laws of supply and demand. Some stocks wind up with zero demand such as.........Enron, Lehman, Bears Stearns etc. In other words a big fat goose egg. For some, stock market is a quick route to empty pockets.

 

[nazzdack]

Quote from nutmeg:
----The two academics examined 45 years of performance of commodities and found they “work well when they are needed most”: when stock market returns are disappointing.
----Professors Gorton and Rouwenhorst highlighted commodities’ diversification benefits.
----the diversification benefits of commodities have become increasingly tenuous as prices in the years following the report’s publication moved in tandem with other major asset classes, including shares and bonds.

Along with "diversification" of markets traded, you have to diversify among long and short positions, otherwise, you'll tend to be "long and wrong" too much.