Fun with the Michael Masters report
Among many other things that Michael Masters might have you believe is that soaring commodity prices are somehow unprecedented in history. The chart below was an integral part of his congressional
testimony (.pdf) last week when he asserted that institutional investors "are one of, if not the primary, factors affecting commodities prices today."
Look at those level prices up until the point that institutional investors starting moving money out of stocks and bonds and into commodities.
But didn't commodity prices rise sharply back in the 1970s?
Apparently not - at least not according to the "S&P GSCI Spot Price Commodity Index", an index that is new to me. Investors tracking this index could have put money into commodities in 1974 and had nothing to show for it for almost 20 years.
If, on the other hand, investment money was put into something that tracked the venerable CRB Index, the investment returns would have been much better.
In fact, that move from 1972 to 1980 makes the recent move look a little tame by comparison. Note that the chart above is a year or so old - the CRB currently stands at about 430 which is a little over double the level in 2002.
By comparison, the index more than tripled from 1972 to 1980.
Maybe it's just the index - "spot" GSCI versus CRB - that accounts for such a big discrepancy. Using data from Dr. Craig Israelson's paper The Benefits of Low Correlation, this is what a $10,000 investment in the "non-spot" GSCI would look like since 1970.
That looks like a pretty steady progression over the last 40 years with a big surge over the last decade.
But, as I learned long ago and discussed in "Fun with multi-decade charts", for a single curve going back almost 40 years, you really should use a log scale.
Wow - that's a completely different curve than the first one in this post - the one that was presented to Congress last week as "proof positive" of the undue influence of speculators on commodity prices.
You know, I've got a couple speaking gigs under my belt now, maybe I should see if I can present my data before some Senate panel. Maybe we can talk about Alan Greenspan and fiat money while we're at it.
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