At the current global financial crisis, stock indexes fell sharply and, at the same time, commodity prices, without exception, suffered a big decline, but not in equal rates. The recent correction in some stock indexes and in some commodity prices raises the following question: have commodity prices reached a bottom yet? If so, a recovery in their prices is to be expected soon.

At the moment, it is not possible to say for sure that the decline in commodity prices is over; what can be observed is a different pattern of behavior among the various commodity groups. The prices of precious metals and agriculture commodities have risen during the last few weeks, and it seems that the down trend in their prices has ended; however, the end of the down trend in energy and industrial metals prices (except steel), which are more influenced by industrial activity, is yet to be seen.

Over these last couple of weeks, which have not been an easy period for investors throughout the world, it has been more interesting than ever to examine what the best kind of investment in the long run has been.

In order to answer this question we have carried a comparison study of the annual returns in nominal and real terms (adjusted to inflation) of the S&P 500 Stock Index and Reuters' CRB Commodity Index from 1956 until now.

There was a lot of talk this year about the dramatic rise of the price of food, which caused strong protests, demonstrations and even strikes around the world, and about the surge in oil price, which in turn caused a significant change in the behavior of users all over the world. The demand for high fuel consuming vehicles has fallen sharply, and there was a strong demand in the US for hybrid vehicles which are less fuel consuming. Late statistics show that people drive less now. But are current commodity prices high in the long term historical perspective, especially after the significant correction that took place during the last six weeks?

In order to compare current commodity prices to their historical values, the influence of inflation on the value of the dollar should be taken into account. For example, the current value of the dollar, inflation-adjusted, is 3.3 times less than its value 30 years ago, and also the average nominal household income today is by far higher than its value 30 years ago.

The dramatic price decline of most commodities over the last five weeks brought some analysts to call for the end of the bull market in commodities; their conclusion is that commodities have reached a turning point and a bigger price decline awaits us. Are they right? Let's see how commodities have done this year.

In the table below, the main commodities are arranged by group and last price; the price at the end of 2007 and the maximum price of each commodity in the year 2008 are also given. In addition, the price change from 2008 maximum value and the price change from the beginning of the year are calculated.

On his column at Forbes.com on July 17, 2008, “Gold And Oil For Soros”, Robert Lenzner says that the legendary investor George Soros, Chairman of Soros Fund Management,“finally shorted oil at $137 a barrel and put on a long position in gold; he expects to see gold hold its ground even if oil continues to decline”.

The reason for this move, according to Lenzner, is his belief in a consistent price ratio of 10-to-1 between gold and oil, and since this ratio fell lately to 7.4, “either gold will rise to 10 times a barrel of oil ($1,350 an ounce) or oil will fall to $96 a barrel--one-tenth the present market price of gold”.

Why invest in commodities? One of the main reasons to invest in commodities is the diversification of one’s portfolio, which normally would include mainly investments in stocks and bonds. It is taken for granted by the investor community that there is no correlation between the price of stocks and bonds and the price of commodities, and therefore the investment in commodities serves as a real diversification tool. However, in case there is a negative correlation between the price of stocks and bonds and the price of commodities, which means they are going in opposite directions, investing in commodities could also serve as a hedging tool, protecting from declines in the equity market and the bond market.

In order to find out which kind of correlation exists or does not exist between the price of stocks and bonds and the price of commodities, we have conducted a thorough study to investigate the correlation in the last 50 years: this period has been divided in 5 year periods, and the correlation for each period has been checked. Some results of the study appear in the tables below, and it is shown that results differ from period to period.