Commodities Investment Strategies
The first prolonged bull run of commodities started after the Black Monday stock market crash of October 1987. Starting 1988, oil and other commodities have consistently been going up, even when the dotcom bubble was at a historic high, and even more so in the aftermath of the dotcom crash. Every time the stock market starts getting jittery, investors shift assets a little more in to oil, gold and agricultural commodities. With a falling dollar, and oil prices slated to keep going up regardless of all other criteria, investing in commodities makes sense, subject to implementation of a proper strategy for diversifying your portfolio with some alternative investments and index funds. The index commodity market has risen from $80 billion in 2005 to over $110 billion in 2007.
Investor James B. (Jim) Rogers, Chairman of Beeland Interests Inc., is still bullish on commodities and forex trading, and advises against flocking to financials like Citi (C) and Banc of America (BAC), even though they may be currently undervalued. Rogers started a raw materials index called RICI in 1988 and the index is now up more than 300% since founding. Merrill Lynch, UBS, ABN-AMRO and others have products linked to his index. When contacted for a comment by this writer, Jim Rogers replied that he expects the commodities run to continue for several more years, even though there may be interim short-term corrections in specific overvalued commodities.
As a general trend, both manufacturing and consumer spending in developing countries like China, India and Brazil is on the rise, while the Western economies are either struggling to maintain growth or are in a downward spiral. Thus, a savvy commodities investor would look for specific commodities which are heavily in demand in these Asian countries. Oil and gold are obvious choices, but prices of both are subject to interference by federal bankers, politicians and legislation. Therefore, an investment in either oil or gold requires constant monitoring and tweaking. India is the gold sink of the world, because not only does their Central Bank stockpile reserves in Gold, but the people of India have a traditional obsession for collecting gold jewelry. A change in import duties on Gold by the Indian Government results in a massive and long-term corrective price change in the global market for gold. Similarly, with oil, OPEC can reduce prices at will by increasing production, tough that is becoming increasingly difficult, considering the intense competition to store up vast reserves of oil. And a big breakthrough in clean energy production, one of the most heavily researched subjects on the planet, could reduce the oil markets to tatters. Thus, we advise investments in oil and gold only for the short term, depending on circumstances, such as Fed rate cuts, or impending general market downturns.
The best long-term bet for investors lies in agricultural commodities. With the global population continuously increasing, it is all but assured that agricultural commodities will be pushed higher and higher in the coming years. Additionally, there is no federal interference to push down prices and individual countries generally let the markets price these commodities. Avoid investing into individual commodities, and invest in to index funds, like Rogers International Agricultural Index (RICI), which allow you to hitch a ride on the general commodities market bull run. These markets have not been tainted by speculative investments pushing up prices artificially, and the price increase is a genuine result of increased global demand. We estimate this situation may not last for too long, since almost every other investment area, including the stock markets, private equity funds, real estate, private companies and mutual funds are likely to be in for a rough year or two, at least until 2010.
In summary, use oil and gold investments to increase short term performance, and allow agricultural commodities to build over the long term. If you feel comfortable with an index, the major players in this area are the Goldman-Sachs and Dow Jones-AIG commodities indexes. Agriculture and live-stock make up about 20% of the Goldman-Sachs index, and about 40% of the Dow Jones-AIG index. Please note that you need to study, and be aware of the rules of online commodities trading, understand the costs and methods of futures contracts for commodities, and also stay in touch with global fluctuations and commodity producing and consuming country specific news items. And as stated above, putting everything you have in to commodities is not advisable. Use commodities investments as a means of portfolio diversification, along with other investments.