“Commodities tend to zig when the equity markets zag.”
—Jim Rogers, commodity expert and co-founder of the Quantum Fund
Let us take a short time trip back to the year 2001. The average price for a barrel of crude oil was 26 USD. In the course of the year, the price of a ton of copper dropped from 1,800 to below 1,400 USD. Gold traded between 255 and 293 USD per troy ounce and made its first serious attempt in modern times to jump above 300 USD.
Prices for wheat and corn averaged 2.70 and 2.08 USD per bushel. The terror attacks of 9/11 on the World Trade Center and the Pentagon, which killed about 3,000 people, were the most traumatizing events in 2001. Although the head of Al-Qaeda, Osama bin Laden, was shot in an elite U.S military mission in 2011, the war against global terrorism still has not been won today, almost 20 years later. But at least a military victory against the Islamic State seems imminent. In the White House, Democrat Bill Clinton was replaced by Republican George W. Bush; 15 years later Republican Donald Trump took over the presidency from charismatic Democrat Barack Obama. Cynical observers note that 9/11 has been replaced by 11/9, the date Donald Trump’s election was announced.
In 2001, commodities as a professionally recognized and investable asset class were still in their infancy. The Bloomberg Commodity Index, as a measure of commodity market performance, had been launched just a few years earlier, in 1998, as the Dow Jones AIG Commodity Index. Alternative investments in addition to traditional investments in equities and bonds have since become more fashionable, thanks to the investment strategies of endowment funds such as those at Yale and Harvard Universities. In 2005, Gary Gorton and K. Geert Rouwenhorst published “Facts and Fantasies about Commodity Futures,” which also helped anchor commodities as an integral part of a global asset allocation.
At the end of 2001, China entered the World Trade Organization (WTO), an event that marked the beginning of rapid growth of the Chinese economy and caused massive turbulence for global commodity markets. Within a few years, China had evolved as a dominant factor in global commodity demand, and the commodity super cycle was born.
Crude oil reached 147 USD per barrel, copper traded above 10,000 USD per ton, gold surpassed 1,900 USD per troy ounce, and wheat and corn shot up to 9.50 and 8.40 USD per bushel. But depression followed euphoria in the form of years of sluggish growth in the aftermath of the global financial and economic crisis. The year 2008 was an annus horribilis for global capital markets, as equity and commodity markets dropped by more than 50 percent. A period of deleveraging and sluggish growth followed a nonsustainable recovery. Thereafter, commodity markets faced five years of a severe bear market.
Today, approaching 2020, we are witnessing the starting point of a new commodity bull market and a maturing of the market for cryptocurrencies. The exuberance of the commodity super cycle is gone, invested assets are rising again for the first time in years, and commodity market performance is up ahead of equities. The price of a barrel of oil tested a low of 26 USD during spring 2016 but has since nearly tripled from that level. Copper traded in excess of 6,000 USD per ton. Gold rose above 1,300 USD per troy ounce. In the agricultural sector, wheat and corn prices averaged 4.80 and 3.60 USD per bushel. From a technical perspective, bottom building was completed in 2016, as commodities went above their 200-day moving average and created a bullish chart pattern in 2017. Nevertheless, even at the start of 2019 the majority of commodities still traded way below their medium- to long-term average prices, and bitcoins are in a phase of bottom-building.
In hindsight, 2016 proved to be the turning point for commodities, as fundamentals started to improve, prices recovered, and the way was cleared for a new market cycle.
The 42 chapters of this book show, on the one hand, that commodity market speculation was not invented in this decade. On the contrary, in the 1980s and 1990s commodities had only disappeared from investors’ radar screens, while the 1970s also saw tremendous commodity price spikes. Many of the episodes described here—from the Dutch tulip mania in the 17th century to the fantastic rise and fall of bitcoins in the 21st century—show how dramatically temporary imbalances on the supply or demand side can affect individual commodity markets. The real economic consequences should not be underestimated, as unlike stocks, bonds, or currencies, commodities are real assets. Political unrest and failing governments because of high food prices in Africa, which led to the Arab Spring, or current instabilities in Venezuela and Brazil due to low oil prices, are only two examples.
Tulips and bitcoins are linked as the two biggest financial bubbles in history, despite nearly 400 years between them. Meanwhile markets and events have given rise to 40 fantastic stories from the commodity world. The wheel of time continues to turn, and due to the cyclical nature of commodity markets, extreme events are doomed to repeat themselves, albeit in a modified form. Each market is determined in its extreme phase by greed and fear; and the short memory of capital markets is proverbial anyway.
The episodes summarized in this book are meant to highlight the booms and busts of commodity and crypto markets. Besides extreme price fluctuations, this book aims to show an insider’s perspective on speculation, gains, and losses that determine individual fates. The extent and velocity of price spikes are stunning, even for long-term investors. Linking commodity market events over several hundred years demonstrates the parallels among events in the past and prepares us for future developments including blockchain and bitcoins.