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Facts And Fantasies About Commodity Futures

 In a 2004 groundbreaking study from The Yale School of Management’s Center for International Finance titled “Facts and Fantasies about Commodity Futures”, Drs. Gary Gorton and Ken Rouwenhorst show that not only are commodity futures negatively correlated to stocks and bonds, but also that commodity returns are greater than bonds and have about the same average returns as stocks. 

The real surprise, however, is that commodity futures returns had a lower standard deviation (lower risk) than stock returns for the 43 years they studied. This study also confirmed that commodity futures work best when needed most in a portfolio. This is mainly because stock and bond returns are negatively influenced by inflation, where commodity futures benefit from inflation. In other words, during periods of inflation or expected inflation, stock and bond returns underperform commodity returns. 

Anyway you look at it; these reports legitimize commodities and challenge the “too risky” myths that have been adopted over time. Perhaps all the stories of lost assets can be attributed to two risky behaviors of investing, unacceptable leverage and poor risk management. However, these risky behaviors have nothing to do with the core properties of commodity futures.

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Charles Maley