Commodities Expected Long-Run Real Return is 0%
Dylan Grice of Societe Generale (SoGen) makes the case that commodity investing doesn’t make sense for the long-term investor (as opposed to the speculator). This has always been the Yeske Buie position as well, and largely for the same reason. Commodities do not have intrinsic value, only value in use. Here’s an excerpt from Grice’s report:
A bushel of wheat, a lump of iron-ore or an ingot of silver today is identical to a bushel of wheat, lump of iron-ore or ingot of silver produced one thousand years ago. The only difference is that they’re generally cheaper to produce because over time, human innovation has lowered the cost of production. When you buy commodities, you’re selling human ingenuity.
Past performance is no guarantee of future results, obviously, but human ingenuity has a good track record of overcoming nature’s constraints so far. A commodity bull market is really just a bottleneck and as a species we’ve succeeded in bottleneck removal. Historically, most bull markets have ended up where they started.