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?
Image 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.
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.
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