Have all the “Supercycle” Gains been Wiped Out?

We have frequently come across articles lately that are purporting to show that commodity prices have in the meantime declined below the lows that obtained at the start of the last bull market. Yesterday Zerohedge e.g. posted a chart from Sean Corrigan’s True Sinews Report, which depicts the GSCI Excess Return Index. The following remark accompanied the chart:


“Returns from being long the commodity super-cycle have evaporated in the last 18 months – to 42 year lows.”


So are commodities as a group really at 42 year lows? Here is a little test: can you name even a single listed commodity that currently trades at a lower price than at any time since January 1974?


commgreschImage credit: Ian Berry / CNN


There is actually no need to check, because there isn’t one. So how can an entire commodity index, which presumably includes a whole range of commodities, have fallen to a 42 year low? Below is a chart that provides us with a hint. It shows the performance of the crude oil ETF USO since its introduction and compares it to the performance of WTIC crude.


1-USO-vs-WTIC Performance of WTIC (red line) vs. the crude oil ETF USO (black line) since mid 2006. USO has declined by nearly 31% more than the commodity the price of which it purports to reflect – click to enlarge.


In one sense, the remark accompanying the GSCI excess return index chart is entirely correct: Had one invested in commodities via this index, the nominal value of the investment would now be at a 42 year low. However, the same is not true of the commodities the index is composed of (although buying them directly wouldn’t have helped much, as we will explain below). The cause of the GSCI’s dismal performance is also the reason why USO has so vastly underperformed crude oil.


Futures Contracts vs. Spot Price

With a hat tip to commodities and seasonality expert Dimitri Speck, who first pointed this problem out to us, we will briefly explain what is going on here. Note that many popular commodity indexes in fact do not reflect actual underlying commodity prices.

This is due to the so-called “roll-over effect”. Normally, futures markets are in contango – this means that later delivery months will trade at a premium over nearer delivery months. The reason for this is that the futures market prices in storage and insurance costs, as well as opportunity costs (in terms of forgone interest that the money tied up in commodities would normally be expected to generate in alternative investments such as t-bills).

In bull markets the contango will often disappear for considerable stretches of time and turn into its opposite, namely so-called backwardation (i.e., later delivery months will trade at a discount to nearer months). Bull markets in commodities are usually characterized by near term supply tightness, or the perception that a supply shortfall exists or is imminent. Backwardation is the market’s way of “driving commodities out of storage” if you will. Conversely, contango will tend to go hand in hand with rising inventories and the expansion of storage facilities.

Given that most investable products, whether they are indexes referring to a basket of commodities or ETFs, invest in commodity futures rather than physical commodities, they are subject to the above mentioned “roll-over effect”. It is simply not practical for an open-ended ETF or an index fund to buy the underlying physical commodities. Adjustments to ETF holdings as a rule have to be made on a daily basis, whenever investors dissolve ETF units or create new ones.

In most standardized futures contracts, every third delivery month tends to be the “active” month in which most of the trading volume is concentrated. Thus, if e.g. USO currently holds front month WTIC futures, it will roll them to the next active futures contract shortly before expiration. Whenever crude oil is in contango, this will automatically produce a loss – and while this loss may seem fairly small on a single roll, it begins to add up after a while. Only when the market is in backwardation will the ETF gain relative to the spot price of the underlying commodity.

Many people are unaware that a number of popular commodity indexes are reflecting the roll-over effect as well – such as e.g. the well-known and widely quoted CRB Index. Thus, the CRB has recently broken to multi-decade lows:


2-CRB IndexThe CRB index has broken to levels well below the 1999-2001 double bottom that preceded the last boom – click to enlarge.


It is certainly true that commodities remain mired in a sharp downtrend and there is no evidence yet that it is over. However, the next chart shows where the spot prices of commodities really are. It still looks like a severe bear market, but it is a far cry from the devastation suggested by the CRB Index.


3-BLS spot price indexThe BLS spot price index of commodities – although they are down a lot from their highs, prices are in reality still 84% above their 2001 lows! – click to enlarge.


A few things need to be kept in mind here. First of all, a “spike low” like the one that occurred on occasion of the 2008 GFC is very rare in commodities. Usually commodities rise very sharply and quickly in bull markets and make spike highs. Once a bear market concludes, they will normally spend a long time trending sideways amid relatively minor fluctuations before they bottom out and reverse course again (this is so because commodity bull markets are driven by fear – namely the fear of shortages).

This means that the times when commodities are in contango will as a rule last much longer than the times when they are in backwardation. A commodity ETF or an investable index investing in futures contracts on the long side can therefore never be expected to be a successful long term investment, as it will almost certainly decline over the long term (absent extreme inflation events, i.e., hyperinflation).

Nor would it make much sense to invest in most commodities in physical form and store them in a warehouse, as the costs expressed by the futures contango, such as storage and insurance costs, would still have to be paid. Moreover, opportunity costs in the form of foregone interest returns would have to be borne as well.


Exceptions to the Rule

There are a few exceptions to the rule. For instance, most precious metals ETFs such as GLD and SLV do invest in physical bullion. However, this is only possible due to the special characteristics of precious metals. If one e.g. looks at gold as a currency rather than a commodity, it is worth noting that it is the 4th most liquid currency in the world. In London alone, some 580 tons of bullion have changed hands every single day in 2015.

Gold is especially suitable for a bullion ETF, as it is in fact mainly used for monetary or investment purposes. A quite sophisticated, efficient and not overly costly storage system exists (gold is also very dense, so it doesn’t take up much space). Ownership changes often merely need to be recorded, without actually having to move bullion physically around. However, even an ETF like GLD comes with costs. It charges very little for administration, storage and insurance (around 20 to 30 basis points p.a.), but this small cost does impact the value per unit year after year as well.



With the exception of monetary commodities such as gold and silver (the prices of which will tend to reflect changes in the fiat money supply over the long term, and which serve as systemic insurance and demonstrably preserve purchasing power much better than fiat money), commodities were never meant to be “investment assets”. They can never be more than a trade, resp. a short to medium term investment.

Moreover, as downtrends in commodities tend to last much longer than rallies and are often of almost similar intensity, anyone trying to make money in commodities should at least be able to go short as well.


Addendum – China’s Growing Woes

The most recent bout of weakness in commodities has apparently been triggered by a still evolving mini-crash in China’s stock market, which has been accompanied by a further noticeable weakening of the yuan. The Shanghai stock market had another bad hair day overnight, once again declining by slightly more than 7%:


4-SSECThe SSEC has been getting hammered since late 2015, losing some 600 points in approximately two weeks. The bulk of the losses has been recorded in just two trading days this year. The yuan has weakened concurrently and all indications are that this will continue – click to enlarge.


The long awaited bust in China finally seems to be well and truly underway (see also: Money and Credit in China for a recent comment on the situation).


Charts by: StockCharts, BarChart, BigCharts



Emigrate While You Can... Learn More



Dear Readers!

It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!


Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke


One Response to “How Big is the Bust in Commodities Really?”

  • wrldtrst:

    Pater, very hard to look at an historical CRB chart becasue they re-balance and re-weight the index every few years. So CRB/CRY 2015 is not the same as CRB 1980 which is not the same as CRB 90’s which is not the same as….. you get the point. Probably over 10 revisions in the past couple of decades. I hate when they do that stuff. Makes charts worthless.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • 5-cotmmrangegc03Ganging Up on Gold
      So Far a Normal Correction In last week's update on the gold sector, we mentioned that there was a lot of negative sentiment detectable on an anecdotal basis. From a positioning perspective only the commitments of traders still appeared a bit stretched though, while from a technical perspective we felt that a pullback to the 200-day moving average in both gold and gold stocks shouldn't be regarded as anything but a normal - and in this case actually long overdue -...
  • gold_bullionGold Sector Correction – Where Do Things Stand?
      Sentiment and Positioning When we last discussed the gold sector correction (which had only just begun at the time), we mentioned we would update sentiment and positioning data on occasion. For a while, not much changed in these indicators, but as one would expect, last week's sharp sell-off did in fact move the needle a bit.   Gold - just as nice to look at as it always is, but slightly cheaper since last week. Photo via The Times Of India   The commitments of...
  • wryAustralian property bubble on a scale like no other
      Australian property bubble on a scale like no other Yesterday Citi produced a new index which pinned the Australian property bubble at 16 year highs:   Bubble trouble. Whether we label them bubbles, the Australian economy has experienced a series of developments that potentially could have the economy lurching from boom to bust and back. In recent years these have included:    the record run up in commodity prices and subsequent correction;  the associated...
  • "What if we don't change at all ... and something magical just happens?"Prepare for the Unthinkable
      Red Ink Growth and profits mask a variety of problems.  They hide business inefficiencies and the money suck of corporate adminis-trivia.  They also conceal unproductive staff.   The final career leap   But most of all growth and profits obscure the extreme value subtracting forces of bloated management teams.  During good times it is unclear what these smug fellows do.  During bad times it is lucidly clear that most of them ain’t worth a darn. When the...
  • andy-duncan-and-claudio-grassA Looming Banking Crisis – Is a Perfect Storm About to Hit?
      Andy Duncan Interviews Claudio Grass Andy Duncan of FinLingo.com has interviewed our friend Claudio Grass, managing director of Global Gold in Switzerland. Below is a transcript excerpting the main parts of the first section of the interview on the problems in the European banking system and what measures might be taken if push were to come to shove.   Andy Duncan of FinLingo.com (left) and Claudio Grass of Global Gold (right)   Andy Duncan: How do you see the...
  • urban_ii_croppedPope Francis: Traitor to Western Civilization
      Disqualified There has been no greater advocate of mass Muslim migration into Europe than the purported head of the Catholic Church, Pope Francis.  At a recent conference, he urged that “asylum seekers” be accepted, “through the acts of mercy that promote their integration into the European context and beyond.”*   Before we let Antonius continue with his refreshingly politically incorrect disquisition, we want to remind readers of two previous articles that have...
  • spankinggoodtimeUS Stock Market - a Spanking May be on its Way
      Iffy Looking Charts The stock market has held up quite well this year in the face of numerous developments that are usually regarded as negative (from declining earnings, to the Brexit, to a US presidential election that leaves a lot to be desired, to put it mildly). Of course, the market is never driven by the news – it is exactly the other way around. It is the market that actually writes the news. It may finally be time for a spanking though.   Time for some old-fashioned...
  • fischersDoomed to Failure
      Larded Up and Larded Over We’ve been waiting for the U.S. economy to reach escape velocity for the last six years.  What we mean is we’ve been waiting for the economy to finally become self-stimulating and no longer require monetary or fiscal stimulus to keep it from stalling out.  Unfortunately, this may not be possible the way things are going.   As Milton Jones once revealed: “A month before he died, my grandfather covered his back in lard. After that, he went...
  • larry-1Meet Your New Stimulus Allocation Czar
      March Towards Midnight The march towards midnight is both stirring and foreboding.  Like a death row inmate sitting down to savor his last meal, a grim excitement greets the reality of impending doom.  Thoughts of imminent mortality haunt each bite.   Tic-toc, tic-toc...   As far as the economy’s concerned, there’s no stopping its march towards midnight.  The witching hour’s rapidly approaching.  We intend to savor each moment and make the best of...
  • state_police_980_600_s_c1_t_c_0_0_1Are the Deep State’s Drones Coming for You?
      What’s Aleppo?   Look out kid Don’t matter what you did Walk on your tip toes Don’t try "No Doz" Better stay away from those That carry around a fire hose Keep a clean nose Watch the plain clothes You don’t need a weather man To know which way the wind blows – “Subterranean Homesick Blues,” Bob Dylan   The entrance to Baghdad's “Green Zone”. Photo credit: Karim Kadim / AP   DELRAY BEACH, Florida – Biggest foreign policy blunder...
  • speculatorInterview with Doug Casey
      Natalie Vein of BFI speaks with Doug Casey   Our friend Natalie Vein recently had the opportunity to conduct an extensive interview with Doug Casey for BFI, the  parent company of Global Gold. Based on his decades-long experience in investing and his many travels, he shares his views on the state of the world economy, his outlook on critical political developments in the US and in Europe, as well as his investment insights and his approach to gold, as part of a viable strategy for...
  • chairman-tienanmen-square-beijingDonald is Right – The System is Rigged
      Scams and Flimflams BALTIMORE – For weeks, the top news headlines have been about politics. And politics has been all about the Republican Party candidate for president of the United States, Donald Trump.   Two very different elections...   The Establishment, the media, and most right-thinking people look around and sniff the air. Something stinks. And the smell, they say, is coming from that skunk, Trump. Meanwhile, Hillary, all greased up with expensive...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank




Realtime Charts


Gold in USD:

[Most Recent Quotes from www.kitco.com]



Gold in EUR:

[Most Recent Quotes from www.kitco.com]



Silver in USD:

[Most Recent Quotes from www.kitco.com]



Platinum in USD:

[Most Recent Quotes from www.kitco.com]



USD - Index:

[Most Recent USD from www.kitco.com]


THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Buy Silver Now!
Buy Gold Now!