Commodities as an investment in comparison with stocks and bonds were discussed in this article. However, we looked only at the return of broad commodity index – S&P GSCI, which might be a bit misleading as it is composed of many commodities, and investing only into a few of them could result in much bigger profits than investing in other asset classes.

Therefore, the returns of specific commodities will be the topic of the following text.

How we would end up putting money into gold, silver, palladium, platina, oil, or even sugar for the period of one, 10, and 26 years, can be seen in the graph below (average returns per annum).

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For exact numbers let’s take a look at following table (average yearly returns).

2016 10 years 26 years
Gold 9,12% 6,19% 4,27%
Silver 17,51% 2,33% 5,33%
Palladium 23,58% 7,63% 8,46%
Platina 4,01% -2,06% 3,05%
Oil 44,76% -1,23% 2,47%
Sugar 29,07% 5,04% 2,85%

Even though last year the best bet we could make was oil rising as much as 44%, in the longer period of 10 years the winner is palladium, on which would gain more than 7% every year for the past 10 years. To remind ourselves figures from the last article, in the same period we could gain 4,67% p.a. betting on stocks, 5,44% p.a. on bonds and -0,85% yearly on broad commodity index.

Palladium overperformed every commodity and other broad asset class not just in last ten years, but in the last 26 years as well. During this period, it would have brought us a satisfying return of 8,46% every year. For instance, the return of S&P 500 in the same period was 7,64%. The question that comes to my mind seeing all these figures is, why is it gold that is among all the commodities so much recommended by experts and public all over the world if we could gain much more betting on palladium which overtook the gold during last year, 10 years and 26 years? Well, hard to say. Maybe the palladium’s price does not respond so predictively to economic factors as gold’s.

And it’s not just palladium having better results than gold. As you’ve probably already noticed, silver is another commodity having higher than gold’s return in 26 years, although in last ten years the return would not be so satisfying.

How big volatility can we expect from these commodities? Can we sleep calmly or should we prepare for sleepless nights because of rapidly rising and falling commodities prices? To find that out, I calculated the coefficient of variation just like in the previous article and used the same formula – calculating it as the ratio of the standard deviation to the mean.

The results can be seen on the following graph.

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Apparently, out of these three commodities gold experienced in most of the years the lowest volatility measured by this ratio, which might be encouraging when considering to which commodities invest. On the other hand, oil, whose returns seem to be rather random than predictive in the long term as its price is driven by other factors than prices of conventional investments, should be used for short-term speculations as we can profit from its high volatility.

Finally, what are the maximum drawdowns of these commodities?

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Not surprisingly, the biggest drawdowns could be seen during the crisis in 2008, when oil fell almost 80% from its peak. If you think the gold or silver will save your savings in case of another crisis, look at the chart and think again. The gold and silver lost in 2008 about 30% and almost 60% respectively from their peak. And pretty ugly drawdowns could be seen in previous years as well, for instance silver’s maximum yearly drawdown was higher than 20% in last six years. Gold has been performing better in terms of drawdowns, but still it would not be anything new if our investment into gold would result in 10% loss if we’re not lucky enough and buy it at its peak.

Good for us, the probability of betting money on a day during the year when the price is at the highest level is 1/365 (assuming not preferring any period of year or day in a week for investing), which should be adjusted for business days when we actually can trade, but the probability will be still low.

In conclusion, even though broad commodity index may not be the best investment, we’ve just seen that by investing in specific commodities and precious metals in particular, in long term we can reach satisfying returns that can be sometimes even higher than returns of the stock market. Therefore, we should at least consider having part of our portfolio invested in this asset class.

(some of the findings of this analysis were published in the printed version of Czech national newspaper “Hospodarske noviny” on 7.2.2017)