How Many Commodity Sectors Are There, and How Do They Behave?

Abstract

We find evidence for five commodity sectors that naturally conform to the standard functional categorizations typically used by the investment industry (industrial metals, energy, precious metals, grains & oilseeds, and livestock). Of the typical investment industry categorizations, only softs do not share a common factor. Using spot data to extend the history of commodity futures, we examine the performance of commodity sectors during periods of economic interest to investors and find 1) The industrial metals sector is very sensitive to economic conditions, while the grains & oilseed sector is insensitive. 2) Energy and precious metals are the sectors that earn the highest returns during periods of high and unexpectedly high inflation. 3) Precious metals do not do well when economic conditions are poor and do not outperform the typical commodity during those periods. 4) We show that commodities in general, and all commodity sectors, earn positive returns during US Dollar crashes.

Keywords: Commodity futures, Factor analysis, Business cycle, Tail events

JEL Classification: E31, F31, G11, G13