Commodities for the Long Run

Abstract

Using a novel dataset consisting of daily futures prices going as far back as 1877, we find that returns of commodity futures indices have on average been positive over the long run. Though return premia are associated with both carry and spot returns, commodity returns in different economic states (inflation up/down, expansion/recession) vary mostly due to moves in the underlying spot price. These economic states are important drivers of commodity returns, even after conditioning on whether commodity markets are in backwardation or contango. The evidence supports commodities as a potentially attractive asset class to include in investors’ portfolios of stocks and bonds.

Keywords: Commodities, Spot Returns, Convenience Yields, Carry, Business Cycle, Inflation, Backwardation, Asset Allocation

JEL Classification: G11, G13, E30, N21, N22, Q02