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Commodity Trading - Commodities In Your Portfolio
Author: Amar Mahallati  | Posted: 27-08-2007 | Comments: 0 | Views: 6 | Rating: (50)  (?) 
From roughly 1974 to 2004, the S&P 500 trended upward. In contrast, the CRB, or Commodity Research Bureau, trended down. The CRB is the same as the Dow Jones Index, which is a mathematical combination of commodities prices indicating their movement. It's comprised of weighted averages of prices on oil, coffee, gold, wheat and other commodities. However, many savvy investors continued to trade in commodities, with many doing very well. Why is this so?
For one thing, indexes don't tell the whole story. General trends don't show the detailed, day-to-day price movements many traders take advantage of in order to make profits. At the end of today, regardless, what matters is the difference you garnered between what you bought and sold, not the actual prices themselves.
For another thing, commodities have historically been part of many intelligent hedging strategies. This is because commodities and stock prices tend to move in opposite directions.
Part of the reason for this may be the contrary stance of many investors. In investing, there's one school of thought, which argues that you don't make money by following the crowd. This is, in fact, a plausible argument with plenty of data to support it historically. In other words, if you want to profit, you have to do what the others aren't. This is both true within an investment type and across different investments themselves.
It is also true that a well-diversified portfolio contains some of everything, including stocks, bonds, cash, and sometimes commodities. This is wise to do as part of an overall hedging strategy and to diversify both risk and income. For example, as a general trend, as bonds move down, commodities move up. Inflation tends to affect each with opposite impact as compared to the other.
Finally, it is an observable fact that many commodities have been moving up for years. The most prevalent example of these is probably oil, while precious metals are typically the "loser." However, in this case, "loser" is relative. The price of gold peaked about 30 years ago, but after dropping sharply it has remained steady since for most of that time. In fact, it has trended sharply upward in the last few years, rising over 40% just since 2003.
Some investors will argue that gold will continue to rise for some time to come. Based upon what the Federal Reserve says about inflation, that may indeed be true. As with any investment, however, no one can be sure. That's why this is called speculation.
However, some commodities are a good bet and will continue to be. For example, wheat, oil, coffee and other consumable commodities will continue to be in demand, because the world simply needs them. Another element to consider is that for some things, like fossil fuels, these will not be replenished so that the more you take out, the harder it is to get what's left.
This is indeed true of gold, with national governments holding large stores. The trend now is toward liquidating them, so it is expected to be under continued price pressure for some time yet. For example, Canada liquidated all of its gold stores between 1980 and 2003.
Oil, too, is likely going to be harder to get. North Sea oil recovery was at its highest several years ago and has been on the decline ever since. Even with the introduction of new technology, supply is not likely to substantially increase in the coming years. However, demand continues to rise, especially from China.
All of these factors are good news for those who wish to include commodities as part of their portfolios, at least in the form of ETFs; there are also other mutual funds that focus on commodities available. There\'s also an additional value to those types of investments, since some tend to move in the same direction as stocks and not opposite to them.
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