586.56%. That’s what the S&P GSCI Total Return commodity index, the longest standing commodity index, returned in the 1970s. Compare that to 17.25% (total cumulative) for the S&P 500. That is a 21.25% annualized return for commodities versus a 1.6% annualized return for equities.
But we don’t think this is an anomaly, the last decade is. From 1970 until the global financial crisis equity peak (December 2007) the S&P GSCI returned 7367.75%. Over that same period the S&P 500 returned about 1/5th of that, or 1495%.
Now let that sink in.
At Auspice we use rules-based, systematic decision making to mitigate behavioral biases. We let data determine our decision making, and we analyze a multitude of markets over the longest periods possible.
Unfortunately, most people let behavioral biases dominate their investing. Short-termism, recency bias, confirmation bias... we see these on a constant basis.
This couldn’t be more true than when it comes to equities and commodities. And we get it. The last decade has been challenging for commodities. We’ve lived and breathed this at Auspice.
But we go to work every day knowing that the last decade has been the anomaly. We look back beyond the last couple years and look at the data. Commodities weren’t a 2000s China story or a 1970’s inflation story. The S&P GSCI had outperformed the S&P 500 until 2015. However, on the back of lucrative commodity returns we went through a period of over-investment, and supply outpaced demand.
In the chase for returns, the pendulum has completely shifted. Investment in commodity infrastructure has been neglected, and supply has diminished. As Goldman Sachs’ Jeff Currie noted in December, “every single commodity market with the exception of wheat is in a deficit today(1)”.
But we won’t get out over our skis on the fundamentals. We are technical traders, analyze trends, and stick to science and facts. It’s in the math.
When we look at long term secular trends, one thing is clear: One trend is overly extended, while one is just breaking out.
What’s your asset allocation?
We’ll zoom into the last two decades and highlight the Auspice Broad Commodity Index and the Bloomberg Commodity Index (two more diversified commodity indexes) to make it real clear.
(1) https://www.spglobal.com/platts/en/market-insights/latest-news/agriculture/120820-goldman-sachs-currie-predicts-long-lasting-bull-market-for-virtually-all-commodities
COMMODITY INDEXES
Definitions:
1 - S&P Goldman Sachs Commodity Index (Total Return) (GSCI TR), is a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities. The total return (i.e., the return on the S&P GSCI™ total return index) is the measure of commodity returns that is completely comparable to returns from a regular investment in the S&P 500 (with dividend reinvestment) or a government bond, while the return on the excess return index is comparable to the return on the S&P 500 above cash.
2 - Bloomberg Commodity Index (Total Return) (BCOM TR), is a broadly diversified index that allows investors to track 19 commodity futures through a single, simple measure. Total Return (TR) Indexes include collateral return.
3 - Auspice Broad Commodity Index (Excess Return) aims to capture upward trends in the commodity markets while minimizing risk during downtrends. The index is a tactical long strategy that tracks either long or flat positions in a diversified portfolio of 12 commodity futures which cover the energy, metal, and agricultural sectors. The index incorporates dynamic risk management and contract rolling methods. “ABCERI” represents returns calculated and published by the NYSE.
Note:
We have used the GSCI TR to represent long term commodity returns as it is the oldest standing commodity index with the longest return history. Both BCOM and ABCERI have shorter return period histories.
We have used BCOM and ABCERI to demonstrate the recent commodity bull market breakout as they are more diversified commodity indexes and more representative of broad commodity market conditions. GSCI TR has a heavy energy concentration with a 62% energy weighting and is, in our opinion, not the best representation of broad commodity market conditions.
Disclaimer below
IMPORTANT DISCLAIMERS AND NOTES
Futures trading is speculative and is not suitable for all customers. Past results are not necessarily indicative of future results. This document is for information purposes only and should not be construed as an offer, recommendation or solicitation to conclude a transaction and should not be treated as giving investment advice. Auspice Capital Advisors Ltd. makes no representation or warranty relating to any information herein, which is derived from independent sources. No securities regulatory authority has expressed an opinion about the securities offered herein and it is an offence to claim otherwise.
QUALIFIED INVESTORS
For U.S. investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to Qualified Eligible Persons “QEP’s” as defined by CFTC Regulation 4.7.
For Canadian investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to “Accredited Investors” as defined by CSA NI 45-106.