Dylan Grice of Societe Generale doesn’t think commodities themselves make a very good investment. In fact, Grice is confident commodities make a real return of 0% over the long-haul.
This may be shocking, with all the bullish talk of surging commodity prices, the market seems a natural investment. Grice contends that, actually, a long-term bet on commodities is a long-term bet against human ingenuity.
From Societe Generale:
Why should commodities provide investors with a real risk premium? Shouldn’t prices actually decline in real terms over time? 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.
Now Grice doesn’t think investors should be ignoring the sector. He just thinks investors should be buying the companies that make these things and develop new tools to make them more efficiently.
Oh, and gold. Grice views gold as a currency, so its relationship does not fit his broader thesis. Which makes sense. Even if commodity prices are going up in dollar terms, they may be flat in real terms. But gold, if his bullish stance prevails, rises in dollar terms and has superior convertibility into multiple currencies (it is a currency, according to Grice).
To prove his point, look at the lack of real return in commodities versus other asset classes.
Photo: Societe Generale
Grice also dismisses the argument of spot prices vs. futures pricing, by suggesting that with commodities markets in contango (rising futures prices) most of the time, you’re actually paying to roll contracts over.
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