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Saturday, September 8th, 2012
five years of commodities

Above please find the five components of the total return indexes for the S&P GSCI Index.  The chart starts five years ago, just as the signs of the impending financial crisis started to pile up.  Stocks would peak a few weeks later.

Some of the commodities kept moving higher, especially oil, before suffering greatly when the crisis reached its climax.

A few considerations:

*The GSCI indexes are production-weighted, and therefore look a lot different than many other commodity indexes.  The combined index — upon which the iShares S&P GSCI Commodity-Indexed Trust (GSG) is based — is very heavily weighted toward energy (and returned -16% for the period shown).

*These are total return indexes.  For their derivation and the other details, check out the methodology paper from S&P.

*The groupings mask some sharp differences within the categories, including a huge fluctuation in the performance of gold versus silver (although the relationship ended about where it began) and the enormous outperformance of crude oil over natural gas.

*Correlations of these assets with traditional stock and bond categories changed dramatically during this period.  Some things that looked to be good diversifiers turned out not to be.

*The precious metals were the clear winners.  If not for the recent sharp rally in the grains, it would be the only category that was above water for the five years.

You hear a lot of talk about what commodities can do for a portfolio.  Make sure you know what exposures you are buying and what your expectations are for performance patterns relative to other assets.  Investors have embraced these alternatives, only to find that they don’t really know much about them other than they’re not stocks or bonds.  (Chart:  Bloomberg terminal.)

investment beliefs

“What are your investment beliefs?”

The first research puzzle in a while goes back to core principles, with a twist.