Commodities Are Strong - But Which Are Strongest?

There’s been plenty written about how well commodities have performed in recent years.

But do you know which of these commodities have done the best between 1999 and 2007? Do you know which ones have been the brightest stars so far in 2008?

Below is a “periodic table” that shows both the absolute and relative performance of 14 key commodities.

click to enlarge images

We put this table together to show how these commodities perform over the long term and how dramatically that performance can change from year to year.

So which of the 14 turned in the top overall performance?

The answer, by a wide margin, is crude oil. For anyone who drives a car, this should come as little surprise.

The price of crude went up nearly 700 percent between the beginning of 1999 and end of 2007. This works out to an annualized return of 26 percent over the nine years, although oil’s returns ranged from a positive 112 percent in 1999 to a negative 26 percent two years later.

The No. 2 performer was nickel, which is primarily used in the production of stainless steel and other alloys. Nickel rose 543 percent between 1999 and 2007, with its best year coming in 2006 when it was up 154 percent.

Third-best on the list was lead at about 410 percent, followed by copper at nearly 360 percent. On the soft side, wheat and corn have tended to move together – in recent years, they’ve done quite well.

At the bottom of the heap was palladium, which rose only 10 percent over the nine years, or barely 1 percent per year on average. That doesn’t mean it didn’t have some good years – palladium was up 113 percent in 2000 and 36 percent in 2005 – but these were pretty much offset by a string of down years.

Coal and aluminum were among the worst performers among the commodities, but even their returns far exceeded those of the Dow Jones Industrial Average (up 44.5 percent), the Nasdaq Composite (up 21 percent) and the S&P 500 (up 19.5 percent) over the nine-year period.

Here’s the complete list:

For the first six months of 2008, most of the talk has been about oil, but crude’s 46 percent rise leaves it well down the performance list.

Coal, up 88 percent between 1999 and 2007, is 140 percent higher so far this year, natural gas has climbed nearly 80 percent and corn 59 percent. Palladium, the long-term laggard, is up 26 percent, while long-term standouts lead and nickel are down 30 percent and 16 percent, respectively.

Commodities have gained stature in the eyes of investors in recent years, and we’re among those who believe that they should be considered a permanent asset class.

We’ve long suggested that investors consider an asset allocation approach advocated by prominent portfolio manager and author Roger Gibson in which investments are divided among four broad classes: domestic equities, international equities, fixed-income securities and hard assets (commodities, precious metals, real estate, etc.), and rebalanced annually. A long-term study by Gibson found that equal allocations among the four asset classes provided a good way of balancing risk and return.

And while commodity prices have been volatile, we believe that they will continue to offer excellent opportunities for investors. The strong growth trend in the BRIC countries and other large emerging markets are the result of voracious demand that is outstripping new supplies.

This trend is the key driver of commodities markets, not the “speculators” being demonized by election-year politicos on Capitol Hill. We would not be surprised by a short-term correction in resource prices, particularly for oil, but long-term we see prices going even higher.
 

Comments

[MarcCourtenay]

Well said Frank. Your work, your fund and what you write reflect both your professionalism and expertise. We are fortunate to have your input in the Seeking Alpha community of writers. Please keep them coming and thanks.
Marc

[phinsuntanning]

Frank, I got a copy of this paper: Speculation, Futures Prices, and the U.S. Real Price of Crude Oil
July 2, 2008

Abstract:
In this study, the real price of oil appears to be determined predominantly by the futures price. Moreover, there is empirical evidence of hoarding in the crude oil market: both oil stocks/inventories and futures prices are found to be positively cointegrated/correlate... with each other. The more speculative six months futures contracts are the way to manage the stocks and make big profits, over any fundamental.