Commodities are cyclical in nature. Returns on commodity investments are not generated in isolation and are influenced by a variety of economic factors. In other words, commodity performance, like other major asset classes, is tied to general economic conditions. Because economies are cyclical, constantly undergoing expansions and recessions, products react according to the current economic stage.
Commodities as an asset class will perform differently during periods of economic expansion and recession.
In general, commodities tend to perform well during late economic expansions and early recessions. The reason is that when the economy slows down, key interest rates are lowered to stimulate economic activity, which tends to help commodity performance. On the other hand, stocks and bonds perform poorly during recessions.
Investors seeking returns at all stages of the business cycle can generate returns in good times and bad by opening up commodities.
The study of cycles, whether in commodities, stocks, or other assets, is not an exact science. Do not use cycles as the basis for trading or investment strategies. Instead, try to use the study of cycles to understand what historical patterns are showing and where asset classes are heading.
Although the historical pattern for commodities tends to be that they perform better in the latter stages of economic expansions and early in recessions, this does not guarantee that the commodity will continue to follow this pattern. In fact, in the recent commodity bull market, commodities moved independently of the business cycle. This performance can be attributed to the fact that this commodity bull market is a different beast than previous cycles.
