(March 13, 2013) — Commodity investors may have dramatically underestimated the length of cycles that commodity prices experience, a paper by a leading academic has claimed.
In a paper entitled “From Boom to Bust: A Typology of Real Commodity Prices in the Long Run,” David S Jacks looks into the cycles the asset class have undergone in the past 160 years.
He found that the real value of 30 commodities studied – which represented $7.89 trillion in production in 2011 – had, by the end of 2011, rapidly increased since 1900.
“Real commodity prices have collectively been on the rise-albeit sometimes quite modestly-from at least 1950 across all weighting schemes,” Jacks said. “This suggests that much of the conventional wisdom on long-run trends in real commodity prices may be unduly “pessimistic” about their prospects for future appreciation or unduly swayed by events either in the very distant or very recent past.”
Jacks found evidence of “commodity price super-cycles”, which entailed decades-long positive deviations, which were usually longer than the medium-term view held by many investors. He found that half of the 30 commodities studied were in the midst of one of these super-cycles evidencing above trend real prices starting from 1994-1999.
He said these super-cycles were punctuated by booms and busts, which are “historically pervasive and becoming more exacerbated over time”.
There was a warning for commodity investors, too: “The common origin of these commodity price super-cycles in the late 1990s underlines an important theme of this paper: namely that much of the recent appreciation of real commodity prices simply represents a recovery from their multi-year-and in some instances, multi-decade-nadir around the year 2000. At the same time, the accumulated historical evidence on super-cycles suggests that the current super-cycles are likely at their peak and, thus, nearing the beginning of the end of above-trend real commodity prices in the affected categories.”
Jacks concluded that commodity prices exhibited little trend currently, but the small element of trend shown by the asset class was in a downwards direction. He added that commodity markets are likely set to experience more volatility, which would affect the growth prospects of nations.
To read the paper, click here.
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