December 3, 2012

Chart of the Week: Commodities Among The Big Winners Of 2012

by Alpha Now Research Team

A quick look at the returns generated by various kinds of commodity investments this year (as measured by spot market prices) is a reminder of how tricky it is to capture outsize gains and how nearly impossible it can be for even the most skilled prognosticator to predict the most lucrative investment trends of any given calendar year.

This week’s Chart of the Week is a reminder of the kinds of events that can derail the best-conceived tactical asset allocation plan. A year ago, few investors would have predicted that a drought in the American Midwest would cause an alarming drop in the quality and quantity of corn and other produce harvested late in the summer and into early autumn, much less that that dry spell would be sending prices of these key agricultural commodities soaring.

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As the Chart of the Week shows, however, the spot price of corn has soared 18.2% since the beginning of 2012, significantly outperforming the S&P 500, which is up about 10.9% over the year to date. And as for wheat prices – well, it’s hard to think of any asset whose price rose by more than 30% over the year.

Some commodity price performances during 2012 were reasonably predictable. For instance, few economists were likely to expect a big gain from copper as long as the global economy remains as sluggish as it has been for most of 2012. Investor interest in gold has been a constant in recent years, and the stock market’s volatility as the mood among investors cycled between “risk on” and “risk off” was – unsurprisingly – responsible for a further gain of nearly 10% in the price of the precious metal.

Commodity prices serve as a reminder of the vagaries that afflict the best forecasters in the business, because their prices see the largest gains or declines in response to unexpected events that affect supply or demand. For instance, while flareups of political tension in the Middle East have caused spikes in the crude oil price, on balance crude’s price has tended to fall lower, in response to gains in supplies, the slow pace of economic growth and the new crude oil discoveries made in the United States – among other factors.

Some of the trends that shaped commodity returns in 2012 may remain factors in 2013, such as the rate at which the global economy manages to eke out growth. Others, like the drought, may be repeated, replaced with others (a catastrophic flood perhaps?) or may be reversed completely over the course of 2013. Particularly noteworthy is the fact that while so many individual commodities seem likely to end 2012 on a positive note, the S&P GSCI Index currently shows a small loss, thanks to its heavy weighting in the energy complex. That serves as another reminder of relying on commodities to fuel investment returns: the magnitude of those returns will mirror the makeup of the fund or index-linked product that you select.

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