Maximizing Returns through Fundamental Analysis - Arabictrader.com

Commodities for the Long Run 31
the Napoleonic wars. There were also significant spikes associated with the
Crimean War, the U.S. Civil War, and both world wars of the twentieth
century. The spike to new highs in the 1970s was due to the generally
inflationary environment and the after-effects of the Great Grain Robbery,
in which the Soviet Union bought large amounts of U.S. grain to alleviate
domestic food shortages. See Ulrich (1996) for a good account of this episode
and a good narrative of grain prices in general over the past 200 years. It
is also interesting to note that wheat prices declined with the stock market
in the late 1920s and the early 1930s. This is important because one of
the main factors determining whether commodities fit into an investment
portfolio is how they do during times of bad equity market performance.
Over the period for which there exists a lot of data on commodities, and
hence the periods that are typically analyzed (including those in this book),
there are few stock market crashes.
Figure 3.2 presents the real price history of wheat. In real terms, the
price of wheat has gone down. It has lost –0.39 percent a year in real terms.
Even though the real price of wheat spiked in the 1970s, it did not keep pace
with inflation and in 2006 was near its low in real terms.
Approaching wheat from the perspective of investing in physical wheat,
Figures 3.1 and 3.2 substantially overstate performance. The reason is that
actually holding physical wheat would entail costs. To store and maintain
1000
1501 = 100
100
10
1500 1600 1700 1800 1900 2000
FIGURE 3.2 Real Price of Wheat