Commodities (--> Wiki)

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Commodities (--> Wiki)

Post by gbs » Tue Feb 20, 2007 8:31 pm

An expanded version of this page can be found on The Bogleheads Wiki.

Trying to order from basic (easy read) to intermediate (I need pen and paper) to advanced (I'm scratching my head).

Low numbers are easy reads, high numbers advanced.

Suggestions welcome and bear with me if I make mistakes.

1. Title: Are Commodities Futures Too Risky for Your Portfolio? Hogwash!
by: Knowledge@Wharton
link: here
date: 04/05/2006
Summary/Quote: Using the most comprehensive data on commodities futures returns ever assembled, Wharton finance professor Gary Gorton and K. Geert Rouwenhorst, finance professor at the Yale School of Management, have reached a surprising conclusion: Commodities offer the same returns as investors are accustomed to receiving with stocks, which are typically viewed as safe enough for ordinary investors.

2. Title: Facts and Fantasies about Commodity Futures
by: Gary Gorton and K. Geert Rouwenhorst
link: here
date: 06/14/2004
Summary/Quote:Fully-collateralized commodity futures have historically offered the same return and Sharpe ratio as equities. While the risk premium on commodity futures is essentially the same as equities, commodity futures returns are negatively correlated with equity returns and bond returns. The negative correlation between commodity futures and the other asset classes is due, in significant part, to different behavior over the business cycle. In addition, commodity futures are positively correlated with inflation, unexpected inflation, and changes in expected inflation.

3. Title: On Stuff
by: William J. Bernstein
link: here
date: 09/2006
Summary/Quote: Over the past few years, I?ve done my best to avoid writing about commodities futures. I really have. They?ve gotten to be such a hot topic, however, that I?ve thrown in the towel. Better to write a piece I can link to, rather than type the same reply once a week, year after year.

4. Title: Not All Commodity Indexes Are Created Equal (Part One of a Two Part Series)
by: Richard Feldman, CFP, MBA, AIF
link: here
date: 06/02/2006
Summary/Quote: Direct investment in commodities has become far easier with the advent of a series of funds based on popular commodity indexes but performance can be drastically different due to the composition and methodology of index construction. (find out more about the practical aspects of investing in commodities).

5. Title: Contango, backwardation, and all that good stuff
by: Prof. James Hamilton
link: here
date: 06/12/2005
Summary/Quote: ...some readers might appreciate a technical background discussion of the way in which carrying costs and convenience yield influence the relation between spot prices and futures prices. So if that describes you, by all means read on.

6. Title: CRB Indexes
by: CRB
link: here
date: current
Summary/Quote: For nearly 50 years, this world-renowned index has served as the most widely recognized measure of global commodities markets. As a benchmark, the Reuters/Jefferies-CRB Index is designed to provide timely and accurate representation of a long-only, broadly diversified investment in commodities through a transparent and disciplined calculation methodology. (this is the CRB index home page with a lot of information)

7. Title: Going Long on Commodities: Six ways to invest in commodities
by: Will Acworth
link: here
date: 05/15/2005
Summary/Quote: ...pension funds and other institutional investors are looking for ways to add commodity exposure to their portfolios. One simple way to do this is by investing in a commodity index. This approach is especially attractive to institutional investors who are familiar with index investing in the equities world and like the idea of "buying the market" in a single transaction.

8. Title: A Rediscovered Asset Class: Commodity Futures
by: raddr
link: here
date: 02/04/2006
Summary/Quote: I have long been interested in using commodity futures as an asset class but until recently there has been no simple way to implement a low cost diversified commodity futures investment into my portfolio. (...) the commodities investment landscape has changed for the better over the last five years or so.

9. Title: Commodities As An Asset Class
by: Frank Armstrong, CFP, AIF
link: here
date: 07/15/2004
Summary/Quote: At first blush, commodities sounds like a risky strategy that only a wild and crazy guy would consider. In fact it's just the opposite. Properly utilized, it's a way to reduce risk in a portfolio consisting of stocks and bonds.

10. Title: Commodities: Boom or Bust?
by: Jeremy Siegel, Ph.D
link: here
date: 04/19/2006
Summary/Quote: Many money managers are recommending that investors put a portion of their money in commodities to hedge against inflation and diversify their portfolio. Is the recent run-up a bubble? Or are commodity prices going even higher? And what does this mean for your investments?

11. Title: Robert Greer Discusses the Benefits of Commodity Investing
by: Robert J. Greer
link: here
date: 03/01/2004
Summary/Quote: We asked Robert Greer, PIMCO?s Real Return Product Manager, about the benefits of commodity investing and PIMCO?s approach to this distinct asset class...

12. Title: Commodity myths
by: David Baker, Executive director, UBS Wealth Management
link: here
date: 10/01/2005
Summary/Quote: Thanks to recent exceptionally high returns, investor focus has once again returned to commodities. Not bad, considering that five years ago the trend was for investments in anything light, virtual and fast. People thought that commodities were heavy and clumsy beings from a prehistoric age. Now the tables have turned and the call is for investments that are solid, down-to-earth and concrete. But is this new craze also subject to a tad too much euphoria?

13. Title: What the Price of Gold Is Telling Us
by: Congressman Ron Paul
link: here
date: 04/25/2006
Summary/Quote: The financial press, and even the network news shows, have begun reporting the price of gold regularly. For twenty years, between 1980 and 2000, the price of gold was rarely mentioned. (...) Since 2001 however, interest in gold has soared along with its price. With the price now over $600 an ounce, a lot more people are becoming interested in gold as an investment and an economic indicator. Much can be learned by understanding what the rising dollar price of gold means.

14. Title: Commodities: A Case for Active Management.
by: Akey, Rian P.
link: here
date: 04/11/2005
Summary/Quote: As we document a variety of the limitations inherent in passive commodities investments via these indexes, we hypothesize that the commodities asset class has a number of distinct characteristics which may make it particularly suitable for skillful active managers to find alpha opportunities;

15. Title: Benefits of Commodity Investment
by: Georgi Georgiev Phd Candidate
link: here
date: 03/01/2001
Summary/Quote:(...) This research places the use of commodity-linked or investible commodity indices as a central part of the investors? asset allocation decision.

16. Title: The Benefits of Commodity Investment:2006 Update
by: CISDM Research Department
link: here
date: 04/01/2006
Summary/Quote:Results show that direct commodity investment can provide significant portfolio diversification benefits to traditional stock and bond portfolios and can provide return opportunities beyond those achievable from commodity-based stock and bond investment.

17. Title: Wilshire Research Commodity Index Comparison
by: Thomas E. Toth, Associate
link: here
date: 04/05/2005
Summary/Quote:(...) Primarily, the greatest differentiating factors are the number of components used to create the index and the method of weighting each component. This summary will include three indices: the Goldman Sachs Commodity Index (GSCI), which is the oldest of the three, the Dow-Jones AIG Commodity Index (DJ-AIG) and the more recently introduced Deutsche Bank Mean Reversion (DBLCI-MR).

18. Title: The Tactical and Strategic Value of Commodity Futures
by: Claude B. Erb and Campbell R. Harvey
link: here
date: 01/19/2006
Summary/Quote:Historically, commodity futures have had excess returns similar to those of equities. But what should we expect in the future?

19. Title: Should passive commodities "investments" play a role in your portfolio?
by: Edwin Denson, PhD
link: here
date: 03/01/2006
Summary/Quote:(...)Simply stated, we do not recommend passive allocations to commodities. The history of investing in physical commodities is less than compelling. There are fundamental reasons that this should be true and will likely be true in the future. The history of investing in fully collateralized commodity futures, which is what most commodity proponents recommend, is puzzling and creates more questions than answers.

20. Title: The Nature of Commodity Index Returns
link: here
date: 2000
Summary/Quote:(...)An asset class must satisfy two main criteria before an investor should consider adding it to a portfolio. First, the asset should increase the expected utility of a portfolio. (...)The other criterion for an asset class is that the returns cannot be replicated with combinations of other assets.This article explores those fundamental reasons as well as other factors that form the basis of commodity investing.

21. Title: Conditional Means, Volatilities, and Correlations in Commodity Futures Markets
by: James Chong and Jo묬e Miffre
link: here
date: 11/01/2004
Summary/Quote:(...)This paper concludes that the conditional means of commodity futures is more often than not negative, suggesting that a short position is optimal. The conditional correlations are also found to rise in periods of recession. This is welcome news to long commodity traders as it is in periods of recession that they need the benefits of diversification the most.

22. Title: Real Return Fund: The Case for a Real Asset Class
by: Christopher A. Moth and John Kirk
link: here
date: 07/14/2000
Summary/Quote: (...)After considering what kind of real returns have been achieved in the past and may be in prospect, how real assets behave in relation to conventional securities, we will examine the effect of combining conventional assets with real ones.

23. Commodity Futures: A Japanese Perspective by Gorton, Gary B., Hayashi, Fumio and Rouwenhorst, K. Geert, (October 19, 2005). Yale ICF Working Paper No. 05-27
We study the basic properties of an equally-weighted index of U.S. commodity futures from the perspective of a Japanese investor. We find that the returns on the U.S. equally-weighted commodity futures index maintain their basic properties, documented in Gorton and Rouwenhorst (2005), when translated into Yen. In particular, looking at returns on Japanese stocks and bonds, the commodity futures index, translated into Yen, continues to display equity-like returns, but with slightly less volatility. In addition, the Yen-based commodity futures returns show essentially zero correlation with Japanese equities and negative correlation with bonds.

contributed by Barry
Last edited by gbs on Fri Feb 23, 2007 5:41 pm, edited 2 times in total.

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Commodities contribution part 2 (Gold and Precious Metals)

Post by gbs » Wed Feb 21, 2007 12:34 pm

1. Title: The Structure and Operation of the World Gold Market
by: Gary O`Callaghan
link: here
date: 12/1991
Summary/Quote: This paper describes the structure of the world gold market, its sources of supply and demand, and how it functions. (...)

2. Title: International Portfolio Formation, Skewness and the Role of Gold
by: Brian M. Lucey and Edel Tully
date: 09/2003
Summary/Quote: This paper examines the optimal allocation of assets in well diversified equity based portfolio where the investor is concerned not only with mean and variance but also with the skewness of the returns.(...)

3. Title: Is Gold a Zero-Beta Asset? Analysis of the Investment Potential of Precious Metals
by: James R. Mccown and John R. Zimmerman
date: 07/24/2006
Summary/Quote: (...)Both gold and silver show evidence of inflation-hedging ability, with the case being much stronger for gold. The prices of both metals are cointegrated with consumer prices, showing additional evidence of hedging ability.

4. Analysis of the Investment Potential and Inflation-Hedging Ability of Precious Metals by McCown, James Ross and Zimmerman, John R., (July 23, 2007).
Gold and silver show strong evidence of ability to hedge stock portfolios and inflation during the period from 1970 to 2006. However, negative betas are only observed for the 1970s, suggesting that it is the inflation-hedging ability that is the cause of the stock-hedging ability. Both metals show high correlation with expected future inflation as measured by the TIPS spreads, confirming Greenspan's (1993) conjecture that gold prices are an indicator of expected inflation.

(contributed by Barry)

5. Is Gold a Hedge or a Safe Haven? An Analysis of Stocks, Bonds and Gold by Baur, Dirk and Lucey, Brian M.,(December 2006)
This paper addresses two questions. First, we investigate whether gold is a hedge against stocks and/or bonds and second, we investigate whether gold is a safe haven for investors if either stocks or bonds fall. A safe haven is defined as a security that loses none of its value in case of a market crash. This is couterpoised against a hedge, defined as a security that does not co-move with stocks or bonds on average. We study constant and time-varying relationships between stocks, bonds and gold in order to investigate the existence of a hedge and a safe haven. The empirical analysis examines US, UK and German stock and bond prices and returns and their relationship with the Gold price. We find that (i) Gold is a hedge against stocks, (ii) Gold is a safe haven in extreme stock market conditions and (iii) Gold is a safe haven for stocks only for 15 trading days after an extreme shock occurred.

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Commodities contribution part 3

Post by Barry Barnitz » Sun Feb 25, 2007 12:34 pm

24. Strategic Asset Allocation and Commodities by Ibbotson, Thomas M. Idzorek, CFA May 2006

25. What Every Investor Should Know About Commodities, Part I: Univariate Return Analysis by Kat, Harry M. and Oomen, Roel C.A;January 26, 2006

In this paper we study the univariate return properties of a large variety of commodity futures. Our analysis shows that the volatility of commodity futures is comparable to that of US large cap stocks. Yet, with the exception of energy, a consistently positive risk premium is lacking in commodity futures. We also find that for many commodities, futures returns and volatility can vary considerably over different phases of the business cycle, under different monetary conditions as well as with the shape of the futures curve. Skewness in commodity futures returns is largely insignificant, whereas kurtosis is significantly positive and comparable to that of US large cap stocks. In almost all commodities we find significant degrees of autocorrelation, which affects the properties of longer horizon returns.

26. What Every Investor Should Know About Commodities, Part II: Multivariate Return Analysis by Kat, Harry M. and Oomen, Roel C.A., June 2006

In this paper we study the multivariate return properties of a large variety of commodity futures. We find that between commodity groupings (such as metals, energy, etc.) correlations are very low and mostly insignificant whereas within groups they tend to be much stronger. In addition, commodity futures are roughly uncorrelated with stocks and bonds. Still, correlations may vary somewhat over the different phases of the business cycle, suggesting that not all commodities make equally good diversifiers at all times. Copula-based tests do not indicate any deviant behaviour in the tails of the joint return distribution of commodity futures and stocks or bonds. Contrary to equities and bonds, we show that commodity futures returns are positively correlated with unexpected inflation (i.e. 25% on average with CPI inflation as opposed to -30% for equities and -50% for bonds). There are significant differences between the various commodities, however, with energy, metals, cattle, and sugar offering the best hedging potential. Altogether, assuming that the observed regularities will persist, our results confirm that a well-balanced commodity futures portfolio could offer a worthwhile diversification service to the typical traditional investment portfolio.

27. The Fundamentals of Commodity Futures Returns
Gorton, Gary B., Hayashi, Fumio and Rouwenhorst, K. Geert, "The Fundamentals of Commodity Futures Returns" (June 2007). Yale ICF Working Paper No. 07-08
Commodity futures risk premiums vary across commodities and over time depending on the level of physical inventories, as predicted by the Theory of Storage. Using a comprehensive dataset on 31 commodity futures and physical inventories between 1969 and 2006, we show that the convenience yield is a decreasing, non-linear relationship of inventories. Price measures, such as the futures basis, prior futures returns, and spot returns reflect the state of inventories and are informative about commodity futures risk premiums. The excess returns to Spot and Futures Momentum and Backwardation strategies stem in part from the selection of commodities when inventories are low. Positions of futures markets participants are correlated with prices and inventory signals, but we reject the Keynesian "hedging pressure" hypothesis that these positions are an important determinant of risk premiums.

28. Understanding alternative investments: The role of commodities in a portfolio by Kimberly A. Stockton, Vanguard Investment Counseling & Research, (08/02/2007)

In recent years, a passive investment in commodities provided high, equity-like average returns, negative return correlations with traditional asset classes, and some protection against inflation. Augmenting a traditional portfolio with an allocation to commodity investments would have improved risk-adjusted portfolio returns. Consequently, interest in commodity investments has increased tremendously. This paper will describe the most popular means of passively investing in commodities—commodity futures indexes—and will discuss their role in a well-diversified portfolio. Although historical returns serve as a useful guide, long-term asset allocation decisions must be based on forward-looking expectations about commodity returns. Detailed analysis of commodity futures index returns will identify key drivers needed to form those expectations. Commodity futures index returns may be broken down into collateral return (U.S. Treasury bills), spot return (the return from changes in commodity prices) and roll return (the return associated with rolling a futures contract forward). Over long periods, the spot return is on average not much higher than inflation, so the roll return is an important contributor to the equity-like returns achieved by some commodity investments. Unfortunately, there is evidence that the roll return is declining or even disappearing in markets where it traditionally has been strongest (such as energy futures markets). So, although a small allocation to commodities may provide some diversification benefits, we caution against making an allocation to commodity investments based on extrapolations of historical returns.
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Post by gbs » Mon Jun 23, 2008 12:25 pm


Commodity futures in portfolios
by: Truman A. Clark
December 2004 ... folios.pdf

Research paper from DFA against using CCF such as GSCI.

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Post by jeffp » Tue Apr 20, 2010 8:39 am

The link for #19 (Edwin Denson white paper) no longer works.
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Post by gw » Tue Apr 20, 2010 9:35 am

I'd put Jack Bogle's opinion at the top of the page:

Bogle wrote:What bothers me about commodities is that they have no internal rate of return. It is rank speculation. All that's behind is someone's willingness to pay more or less.

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Post by gw » Tue Apr 20, 2010 9:41 am

Also, it would be nice if each summary somehow captured the author's general opinion about commodities as investments. For example, it's not clear from the summary how Bernstein sees things, but it's clear enough from his conclusion:

William Bernstein wrote:In other words, the next time someone tries to sell you a commodities fund based on the Goldman Sachs Commodities Index, smile and say, "Sorry, but I’m from Earth and you’re from planet I Love Lucy. Let’s revisit this discussion in an alternate universe."

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Post by tari » Fri Jan 14, 2011 6:09 am

Commodity futures in portfolios
by: Truman A. Clark
December 2004
Research paper from DFA against using CCF such as GSCI.

PDF do not want to open.

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Post by LadyGeek » Mon Feb 14, 2011 8:45 pm

Welcome! You can also find information in the wiki. Look for the "Wiki" link at the top of every page.

Wiki article link: Commodities

Update: The Clark paper link is noted as broken on the wiki page. I can't find any other sources via google.
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Post by nydad » Mon Feb 14, 2011 11:29 pm

Thanks - great resource - a question though - if you read all of those papers - what is your conclusion? And is there a fund which stands out if your conclusion is to buy?

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Post by staythecourse » Tue Feb 15, 2011 10:45 am

nydad wrote:Thanks - great resource - a question though - if you read all of those papers - what is your conclusion? And is there a fund which stands out if your conclusion is to buy?

I can tell you without reading any of those papers the answer is it depends on who or what you believe the data tells you.

There will always be debates. The smartest "experts" are more often wrong then right, so do what seems to make sense logically to you and stick to the plan.

Good luck.
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