The Most Important Thing To Know About Commodities Is...

You must remember this
A kiss is still a kiss
A sigh is still (just) a sigh
The fundamental things apply
As time goes by...

The darn things are mean reverting. It's not rocket surgery.

See, for example:
Société Générale's Dylan Grice-"Commodities: ‘Their Expected Long-Run Real Return is 0%’"
Commodities: "The Case for Human Ingenuity"
Commodity Prices Tend to be Mean-Reverting (cotton)

Or see FT Alphaville:
Time to start treating commodities as currencies?

A few weeks ago, Michael Masters, of the eponymous US investment firm, made the point to FT Alphaville that bad things can happen whenever investors mistake the fruits of production for the means of production, and apply long-standing “long only” strategies (more suited to equity index markets) to assets like commodities.

Earlier this month, Nomura put out a note that observed much the same point.

Specifically, they argued that commodities should be treated like currencies and valued with macro-trading tools that incorporate the concepts of carry, value and momentum.

Just like currencies, they said, commodities are a relative value play that come along with risk premia that is neither constant nor random. What’s more, when factors like momentum, carry and value are applied into commodity models these assets become time-varying and semi-predictable.

The strategy has certainly paid off for Nomura over the last five years, as the following chart shows:

Nomura explains the strategy as follows (our emphasis):

This strategy is based on the view that commodities are more like currencies than equities. Rather than hold long-only positions in liquid commodity futures, the strategy is based on indicators used for macro assets, such as momentum, carry, and slope. The past five years have been turbulent for long-only commodities and many commodity hedge funds. However, MaCS has delivered robust and consistent outperformance over these benchmarks (Fig. 1). The Sharpe ratio of MaCS has been materially higher than that of long-only commodities and commodity hedge funds as shown in Fig. 2. Furthermore, this outperformance has come with lower drawdowns and positive skew.

The best way to understand this is that commodities — just like currencies — represent the value of society’s surplus float of goods, services and resource. These are the reserves kept on standby to ensure liquid and efficient distribution that matches the wants and needs of all economic participants....MORE

You cannot be a permabull in currencies or commodities. That luxury is reserved for equities hucksters.
The history of  U.S. stocks has been a very slight daily average skew to the upside over the history of the S&P/Cowles Commission indices.

That slight skew has added up to a compound average real return of 6.8%, more than enough to make anyone who figured out that "long ain't wrong" very wealthy.

That is, until long is wrong.

More to come.