Tuesday, September 12, 2006

A look at commodity indices

I was reading the commodities page of FT's "Markets" section today, when I reminded myself to take another look at the various commodity indexes and see how they're constructed.

These indexes represent the price performance of a basket of commodities, but the index configurations may vary. Some of the indexes have entirely different weightings among component groups and individual commodities, while others might neglect a particular commodity or group entirely. Since once index may differ from another, returns are likely to diverge as well.

This seemed evident when I looked down the page and noticed that the DBLCI-MR Total Return Index (based on the Deutsche Bank Liquid Commodity Index) was recently up over its year ago period, while the well known GSCI Total Return is down from a year ago. What gives?

Well, when I looked up the page to see Kevin Morrison's article, "Indices battle against 'contango'", I began to understand. Read this article to find out how the indexes are affected by the presence of a contango in the commodities markets.