So for example, in January 2001, aluminum was $1,620 per MT. This is equivalent to $2,163 in 2013 dollars. At that price, we would have expected aluminum to return about 1.05 times in ten years (a 5% gain) excluding inflation. In fact aluminum returned 1.11 times. The red line is where we are now. So the model is saying that aluminum is undervalued. You can expect it to rise about 40% in ten years in inflation-adjusted terms. If inflation is 2% per year, the actual rise will be 70%.
I have done a lot of statistical work on these relationships, and they are very robust. The reason is probably the old “cobweb” price theory. High prices bring out more production and consumer cutbacks. These lead to low price which in turn bring production cutbacks and higher consumption.
There is an important caveat to this analysis. Sometimes, this time really is different. Every now and then major changes reset the cost curve for a product permanently. A recent example is the introduction of hydraulic fracturing for natural gas in the US. On the other side is the draining of many low-cost reserves
of crude oil and some minerals. So this analysis is really a starting point. To go further, you have to have some knowledge of the industry in question. I'll go into that in later posts.
To see all the graphs go to the page "Ten Year Forward Return Graphs".