Commodities are an interesting resource class right now for a number of factors. Commodity investing is a good way to play both offense (global economic recovery) and protection (a hedge for your profile against rising future pumpiing and a falling dollar). They are also a great portfolio diversifier which can reduce the overall risk (volatility) of your portfolio.
Playing Offense: The global financial rebound is coming, and goods will benefit.
Most of the economies in the world are currently within severe recessions or have considerably lower economic growth compared to 2 years ago. There are now numerous signs that the US economic climate and many other economies have bottomed out and are starting to display signs of life again. all of us economic growth has enhanced from a -6% rate over the winter to a -1% price in the second quarter of 2009 and it will likely show positive financial growth in the second half of 2009. As the economies around the world go from serious recessions to positive economic development over the next 2 years the demand for commodities will increase and their prices will go up. this particular global economic growth is likely to be led by China and many other emerging countries which tend to be commodity-based or commodity-heavy financial systems. China recently announced that their own GDP growth in the 1st half of 2009 was seven. 1%, putting them upon pace to pass Japan as the world’s second largest economic climate by yearend. Investing in goods is somewhat of a back-door play on emerging market development.
Playing protection #1: Commodities are an off-set against future inflation.
Historically commodities have been one of the best hedges against inflation. I am somewhat concerned about future pumpiing due to the massive monetary stimulation the US government has pushed over the past year.
the particular monetary fire hose has been on full blast. large monetary stimulus has in the past led to higher inflation 1-2 years later.
actively playing Defense #2: Commodities are a hedge against a dropping US dollar (for all of us investors).
Commodities are a good hedge against a dropping dollar, which is another substantial concern for many investors (including myself). Most major goods (such as oil, precious metal, etc. ) are costed in dollars around the world. When the US dollar gets less strong it has typically caused the price of commodities (in dollars) to go up. The US dollar has been poor for some time, and may continue to deteriorate going forward. A weaker buck makes US citizens poorer relative to other countries. The US government’s massive “borrow and spend” fiscal stimulus plan offers caused our budget debt to balloon. This leads to international investors to be progressively concerned and to pull their money out of the US, pressuring the particular dollar downward.
Commodities are a good portfolio étendre which can help reduce your overall profile risk.
One of the primary factors investors add commodities to their portfolios is because they have in the past had a low correlation with the returns of other opportunities such as stocks and provides. This reduces the risk of your overall portfolio as the losses in some investments are offset simply by gains in others. in Longview Wealth Management we are always looking for investments that have an attractive risk/reward ratio on their own AND that have a low relationship of returns with other investments in our portfolios. Over the past 10 years (1998-2007) the correlation associated with returns between commodities and large US stocks has been just. 14 and the correlation associated with returns with US bonds has been -. 24. These are very low correlation ratios which show that commodities can provide effective diversification benefits to your profile. Commodities can be volatile opportunities on their own but as a group can actually lower the risk of your overall profile over time if they are used correctly.
What are the disadvantages of commodity investing?
1. Individual commodities are usually volatile and risky. For this reason commodities should represent only a small portion (15% or even less) of most investor casinos. We recommend a varied basket approach to investing in goods.
2. Investing in particular individual commodities can be difficult plus complicated for many investors.
3. Commodity investments avoid pay interest or payouts to investors.
How to Play It? the particular Powershares DB Commodity monitoring Index ETF (DBC)
Based on my research one good way to get investment exposure to commodities in general is the Powershares Commodity Tracking Index (symbol DBC). This exchange exchanged fund (ETF) is one of the biggest and most widely traded varied commodity funds. It provides varied exposure to the most widely exchanged commodities including crude oil (39% of the fund), heating essential oil (18%), gold (15%), whole wheat (15%), corn (13%), plus aluminum (10% of the fund). The expense ratio on this account is. 75% which is below average for commodity funds.
This commodity ETF peaked in July associated with 2008 at around dollar 45/share and then declined regarding 60% to its bottom part of below $ 20/share in March of this year. The commodity index seems to have been in a bottoming process over the past 6 months and has recently began showing signs of life jumping back up to the current price of dollar 22. 50/share. This commodity index just broke through the 200 day moving typical over the past couple of weeks on the benefit. I think there is good benefit from here over the long-term.
Keith Tufte
President
Longview Wealth Management, LLC.
http://www.longviewwealth.com
www.abndigital.com We often consider source shares when wanting to invest in commodities. When doing so we take on company specific risks and the ensuing i…
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