The bull market in commodities
- September 1, 2022: Vol. 9, Number 8

The bull market in commodities

by Leigh Goehring and Adam Rozencwajg

Consider the comparison between the Goldman Sachs commodity index versus the level of the U.S. stock market, as measured by the Dow Jones Industrial Average. Although the Goldman Sachs commodity index was only constructed in 1971, we reconstructed it going all the way back to 1900. The upshot: Commodities and financial equities have both traded in long cycles that are usually inversely related.

Over the past 130 years, there have been four times when commodity markets became radically undervalued versus the stock market: 1929, the late 1960s, the late 1990s, and today. After each period of radical undervaluation, commodities entered into large bull markets and then proceeded to become radically overvalued. If you had invested in commodities or commodity-related equities in any of these three previous periods, the returns on both an absolute and related returns basis were huge — even in the 1930s.

Constructing a natural resources equity portfolio that consisted of 25 percent energy, 25 percent metals and mining, 25 percent precious metals, and 25 percent agriculture would have significantly beaten the stock market in each of these cycles.

For example, had you invested in such a natural resource portfolio in 1929, your return would have been 122 percent by 1940, which doesn’t sound like much, but compared to the Great Depression-ravaged stock market, the returns were almost spectacularly good. Between 1929 and 1940, the stock market fell 50 percent. Also, the 1930s was a period of chronic deflation and consumer prices fell over 20 percent between 1930 and 1940. In real terms, commodity prices (and related equities) offered real returns of almost 180 percent — not bad in a period that included one of the greatest bear markets in history and a full-blown banking crisis that required the temporary suspension of the world financial system.

In 1970, a similarly constructed natural resource equities portfolio would have returned 400 percent by 1980, a return that handily beat the stock market which returned only 80 percent for the decade. Inflation was a huge problem in the 1970s and consumer prices advanced almost 130 percent for those 10 years. Natural resources not only provided excellent relative returns versus the stock market, but they provided investors with nominal returns far above the inflation rate as well.

And finally in 2000, a similarly constructed natural resources equity portfolio would have returned 360 percent between 1999 and 2010, significantly outperforming both the stock market, which returned nothing during that time period, and the inflation rate, which advanced 35 percent over those 10 years. Even though the 1999-2010 time period saw both the breaking of the dot-com stock market bubble, the Lehman Bros. financial collapse, and a global banking crisis, commodities again provided excellent returns relative to financial assets, as well as excellent returns relative to inflation.

These three periods couldn’t have been more different: the 1930s were a period of deflation and global depression; the 1970s were a period of severe inflation and worries over currency debasement; and the 2000s were a little bit of everything including a stock market collapse, a global financial panic, and an oil price spike not seen since the 1970s.


Leigh Goehring and Adam Rozencwajg are managing partners at Goehring & Rozencwajg. Read their complete report on the firm’s website at this link:

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