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In a recent conversation, I was reminded of the equity/commodity cycle, which has repeated itself over the past 50 years. A graph illustrating this cycle is shown below. Keep in mind this is a relative-strength graph and not a directional price graph. This means that the movement (up or down) in the graph represents the strength or weakness of commodities relative to equities. Since 2008, the graph has been declining. This indicates that commodities have been underperforming equities, not necessarily that commodities have been going down.

Relative Strength Chart

We can see by the level of this relative-strength graph that, by historical comparison, commodities are attractive relative to equities. If history repeats itself, the probability is favorable that commodities will perform better than equities over the next 10 years. This is not an investment timing tool. However, it can be useful in constructing strategically diversified portfolios. By making sure portfolios include allocations to alternatives such as gold, we can craft portfolios that are more durable over time than portfolios that have been lulled into thinking that equities not only always go up but that they always outperform.


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