At this point, commodity investment advocates correctly point out that you are not investing in spot commodity indexes but rather in commodity futures, where the roll yield from one contract to another, the return on collateral and the rebalancing yield on the index have to be added to the return on the spot indexes.
Fine. Let’s switch the basis of comparison from spot commodity indexes to the Bloomberg and S&P GSCI total return indexes and re-index the start date of the analysis to the January 1991 inception of the Bloomberg total return indexes. The S&P GSCI, adjusted for the PPI alone and with the dual adjustment, has gained 0.14% and 0.19% per annum, respectively. Comparable figures for the less energy-intensive Bloomberg indexes are 1.60% and 1.65%, respectively (see “Long-term trend,” below).
For purposes of comparison, the average annual PPI- and PPI/dollar-adjusted rates of return for the Russell 3000 index have been 7.71% and 7.67% since January 1991. If we move to the Treasury market, the average annual returns for seven- to 10-year notes have been 4.68% and 4.63% after adjustment. The average annual increase for the PPI since January 1991 has been 2.10%; the Federal Reserve’s trade-weighted dollar has gained 0.05% per annum.
Past performance, future results
The data during the past quarter-century have been irrefutable: After three stock market rallies and two hellacious busts, after the most disbelieved bull market of all time, long-term Treasuries, and after a huge commodity rally produced by China’s integration into the global economy intersecting with long years of underinvestment, financial assets outperformed the PPI and the PPI outperformed commodity indexes.
Everything commodity bulls could have hoped for in terms of monetary debasement happened. The one thing they never counted on was the market’s ability to increase supply and reduce demand growth while finding ways to add value to non-commodity enterprises.
No one can predict the next quarter-century, and it seems highly unlikely from a mathematical viewpoint, that, if nothing else the fixed-income rally will be duplicated. But no one will repeal the laws of supply and demand between now and 2040, meaning we should expect real physical commodity prices to continue their long-term declines.