The collapse of commodity prices - is anybody listening?
Posted on 23-06-2009 by Steffen Sorensen | 0 comments
In March 2007 the Financial Services Authority published a report entitled ‘Growth in commodity investment’ in which they state:
‘...this [commodity] boom has mainly been caused by dramatic growth in demand (particularly from the rapidly developing economies of China and India); i.e. it is underpinned by what seem to be long-lasting fundamentals. It is widely stated that institutional investors will stay for the long term’.
Writing two years later, this assertion seems somewhat void. The FSA and others with ill-conceived perceptions of the safety and diversifying properties of commodities were proven wrong. We have seen it all before.
S&P GSCI Excess returns indices (semi-log scale)
Data Source: Bloomberg derived
Managing your risks is never easy. Recent analysis at Barrie & Hibbert in the light of developments in commodity prices in 2008 concludes that there are three important lessons worth highlighting:
- Neither empirical evidence nor economic theory conclusively demonstrate that a risk premium is, or should, be earned on commodity investments over the long term.
- In the short term and during periods of wider market stress commodity investments may not prove to be a good hedge.
- The volatility of returns on commodities can be highly unstable over the short and medium term. Economic downturns are often related to volatile commodity markets.
Read more in our Model Insights report ‘Lessons for commodity investors’ by H. Hibbert, June 2009.
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