Post Modern Investment: Facts and Fallacies of Growing Wealth in a Multi-Asset World

Chapter 5

Commodities

An Ever-Changing Balance

In the mid-1990s, we were asked by American International Group (AIG) to be part of a new advisory board that was to be involved in the creation of a new commodity index product, the AIG Commodity Index. Although commodities have been a central part of the economic landscape since the dawn of civilization (i.e., early examples exist in 3000 BC of forward contracts for the exchange of commodities for other basic goods), commodities came into existence as tradable assets with the introduction and development of commodity futures markets in the mid- to late 1800s. The growth of both financial markets and commodity markets in the twentieth century led to new ways of investing in commodities (options), including direct investment in the equity of commodity firms. Direct investments in firms that produce or consume commodities, however, do not offer the same return and risk opportunities of direct investment in commodities. Similarly, investment in a single commodity does not offer the same risk and return opportunities of investment in a basket of commodities. Fortunately, the continued growth of interest in commodities in the last century led to the creation of a number of commodity indices designed to reflect the performance of an index of commodity investments.

Commodity indices, which have been in existence since the 1860s (e.g., The Economist Commodity-Price Index), were popularized in the United States in the 1930s, when the Commodity ...