Friday, October 06, 2006

William Bernstein questions the return hype of commodity futures

In a recent article at the efficient frontier, William Bernstein, wrote an interesting article questioning the hyped return of commodity futures.

He reviews a recent article by Gary Gorton and Geert Rouwenhorst of Wharton and Yale that analyzed and discussed the returns of commodities from July 1959 and December 2004. The return was 3.47%, compared to inflation of 4.13% for the period (Bernstein notes that commodity pricing is the significant component of inflation calculations and felt the numbers made sense).

By rebalancing in equal weights the portfolio had a return of 6.66%, for a bonus of 3.19%.

However, a portfolio of futures contracts equally weighted and annually rebalanced yielded a return of 11.18%. Numbers which rivalled the S&P 500 for the period. Results like this obviously fuel commodity speculation.

However, Bernstein goes to great effort to describe the significant changes in commodities markets. In the past, commodity futures emphasized protection against deflation. He asserts today's emphasis is far greater on preventing inflation (think oil price hedging). This radical shift would upset Keynesian normal backwardation - the mechanism that drove the futures contracts profits and instead usher in a period of contango, where future prices trade above - not below the spot (market) price of a commodity.

It's an interesting article, I recommend you read it.

Have a wonderful weekend,

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