Commodities Long-Run Return is Zero, Says SoGen Analyst

“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.”

There’s the rub.

Grice is absolutely correct of course that commodities are inferior to goods and services that are improved by humans and that can grow in value. He points out that commodities do not generate cash flow, a fact he uses to buttress his argument that buying commodities is really a form of speculation and not an investment.

(And, to his credit, he again delimits his argument by adding: “The hardest commodity-like asset to categorize is land, an asset that is valuable to a future buyer because it will deliver cash flow, not because it will be sold to a future speculator.” Here he correctly concludes that land, though a real asset, is categorically distinct from commodities.)

So far so good.

The problem, however, is precisely that as a species we’ve succeeded in imposing bottlenecks now and then.

The run up in gold reflects weakness in our financial institutions, debased currencies, sovereign default risk and fecklessness in fiscal and monetary policy. If human ingenuity succeeds in solving these “bottlenecks,” then it would be time to rotate out of commodities.

Yes, commodities have returned close to zero over the past 140 years; but those past 140 years have been a period of exceptional growth in human history.  

As Grice points out, past performance — even over a century — is no guarantee of future results. Including commodities in a portfolio is therefore an affirmation of the first principle of investing: diversify.