Hi just wondering what other contributors think. Commodities and oil have been in a bear market for the last few years. Foolishly I have a fairly big chunk of my investments in oil and to a lesser extent mining companies. The predictions are now dire for commodities and not great for oil. Some commentators are saying that the bear market could go on for years, yet on the other hand the world poulation is rising and everyone is consuming more stuff as more people live western lifestyles. So my thinking is that the commodity bear markets wont last for so long now as there are so many more consumers than there were in the past when it was really only Europe and America living these high consuming lifestyles.
commodities and oil companies now
- Thread starter joe sod
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I cover this question in the Investment and capital markets course I teach at DBS.
There is good data on the spot oil price .
I examined the period June 1983 to end 2011
The average annual growth in the oil price was 4.04% volatility 33.88
The average annual return from US Treasury Bills was 4.42% volatility 0.74
So, the oil price flaps about like a paper kite in the wind but returns less than cash. We need an economic explanation.
A broadly diversified basket of commodities is pretty much how we define inflation and the current weighting of oil in a commodity index is around 50% so we should expect that the oil price and inflation are correlated.(it is but not strongly 0.278 due to the high volatility of the oil price relative to inflation)
We also know that the return from cash has been approximate to inflation over the long run.
So, we can infer that, on average, we should not expect the return of oil to exceed cash over time but given the volatility of the oil price, there will be a wide distribution around this average.
Now, you could argue that as the supply of oil declines prices should rise but you also need to engage in second stage thinking so as the price rises it is likely that our dependence on oil will reduce and so demand should shift with progressive use of renewables.
I have also researched mining stocks and it's a similar argument I'm afraid.
Miners should allow you to leverage movements in the spot price of a commodity. However, no different to farmers, the mines often hedge the price in the futures market so it's never a simple picture.
I looked at the argument for say buying gold mines.
In the 1920s a model T Ford cost about 14 ounces of gold. In 2010 the best selling car in America was the ford f150 which cost around $22,000 or 14 ounces of gold. So, yes you don't lose over time is the argument. If that sounds the same as the earlier oil argument I think you are correct.
This wealth preservation argument doesn't capture the opportunity cost of not properly using that capital. The same $290 invested in the S&p 500 over the same period would have grown to $873,529 with dividends reinvested.
You should not expect to become better off from buying commodities.
So testing the gold mines series from Ken French's website at the Tuck school of business at Dartmouth College against the S&P 500
Between 1963 and 2011 the gold mines were positively correlated with the spot gold price (0.57)
Gold spot 7.99%pa
Mines 7.42%pa
S&p 500 9.66%pa
the mines were twice as volatile as the more diversifed s&p 500 index.
Yes, if you only look at the period during the oil price shock in the late 70s you would have done better but on average you lost from buying mining stocks relative to the S&P.
As in all these things if you can reliably and accurately predict the movement of an underlying issue like the spot price of oil ahead of time then all else being equal you might be able to profit from speculating.
However, if like the rest of us you don't have a crystal ball then the odds suggest that buying a broadly diversified portfolio is probably the best investment approach.
There is good data on the spot oil price .
I examined the period June 1983 to end 2011
The average annual growth in the oil price was 4.04% volatility 33.88
The average annual return from US Treasury Bills was 4.42% volatility 0.74
So, the oil price flaps about like a paper kite in the wind but returns less than cash. We need an economic explanation.
A broadly diversified basket of commodities is pretty much how we define inflation and the current weighting of oil in a commodity index is around 50% so we should expect that the oil price and inflation are correlated.(it is but not strongly 0.278 due to the high volatility of the oil price relative to inflation)
We also know that the return from cash has been approximate to inflation over the long run.
So, we can infer that, on average, we should not expect the return of oil to exceed cash over time but given the volatility of the oil price, there will be a wide distribution around this average.
Now, you could argue that as the supply of oil declines prices should rise but you also need to engage in second stage thinking so as the price rises it is likely that our dependence on oil will reduce and so demand should shift with progressive use of renewables.
I have also researched mining stocks and it's a similar argument I'm afraid.
Miners should allow you to leverage movements in the spot price of a commodity. However, no different to farmers, the mines often hedge the price in the futures market so it's never a simple picture.
I looked at the argument for say buying gold mines.
In the 1920s a model T Ford cost about 14 ounces of gold. In 2010 the best selling car in America was the ford f150 which cost around $22,000 or 14 ounces of gold. So, yes you don't lose over time is the argument. If that sounds the same as the earlier oil argument I think you are correct.
This wealth preservation argument doesn't capture the opportunity cost of not properly using that capital. The same $290 invested in the S&p 500 over the same period would have grown to $873,529 with dividends reinvested.
You should not expect to become better off from buying commodities.
So testing the gold mines series from Ken French's website at the Tuck school of business at Dartmouth College against the S&P 500
Between 1963 and 2011 the gold mines were positively correlated with the spot gold price (0.57)
Gold spot 7.99%pa
Mines 7.42%pa
S&p 500 9.66%pa
the mines were twice as volatile as the more diversifed s&p 500 index.
Yes, if you only look at the period during the oil price shock in the late 70s you would have done better but on average you lost from buying mining stocks relative to the S&P.
As in all these things if you can reliably and accurately predict the movement of an underlying issue like the spot price of oil ahead of time then all else being equal you might be able to profit from speculating.
However, if like the rest of us you don't have a crystal ball then the odds suggest that buying a broadly diversified portfolio is probably the best investment approach.
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Brendan Burgess
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We do not allow discussion of individual shares on askaboutmoney and as contributors have shown that they cannot resist discussing individual shares, I am closing the thread.
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