Wednesday, April 29, 2015

Mean Reversion in Commodity Markets

In VoxEU this week (excerpt):

Commodity prices: Over a hundred years of booms and busts
Andrew Powell 28 April 2015

Commodity prices are very persistent. A boom is always followed by a bust, and after a slump, a boom comes along. This column reviews some basic aspects of commodity theory and their role in the last boom. Finally, it presents arguments stating that lower commodity prices are here to stay for a while. We may have to wait many years for the next boom to come along.

Commodity prices are very persistent. During booms we seem to forget that they have always (yes, always) been followed by busts (see Figure 1). And during a slump we forget that a boom is surely going to come along— we just have to wait long enough. What determines such booms and busts? Was the last boom exceptional? Where are prices today relative to long-run trends? And the big question – where are prices likely to go from here?

Great article on the history of commodity prices from the 1900s to the present. If Mr Powell is correct, we're in for a loooooong wait. And this is even without accounting for the relative prices of commodities against manufactured goods.


  1. I think one of the key factors in the last commodity super cycle was the presence of non-commodity players such as hedge funds and other financial institutions which have taken huge positions thanks to the easy availability of cheap money. This contributed significantly to the boom.

    What is highly amusing is to listen to CEOs of these big commodity companies and analysts during the super cycle talking. The CEOs and their swooning fans in the business media somehow convinced that the performance of these commodity companies are due to the superman-like capabilities of their CEOs rather than the market factors. And the commodity analysts very often completely forget the market cycles and predict uninterrupted price increases. Unfortunately despite all the scandals and the subsequent regulations the analysts still fail to play their part in a neutral manner and act as cheerleaders for the companies and CEOs.