Commodities advisor and author says newer instruments like ETFs are behind growth of commodities as an asset class.
Amine Bouchentouf, who wrote the first edition of “Commodities for Dummies” in 2006 and the title’s second edition last year, is partner at Parador Capital LLC, an investment advisory firm focused on commodities and emerging markets. He is also the co-author of “High-Powered Investing for Dummies.” Bouchentouf recently sat down with HAI Managing Editor Drew Voros to discuss commodities and their growth among individual investors.
Hard Assets Investor (HAI): What type of changes have you seen in commodity investing?
Amine Bouchentouf: I think that’s an excellent question, because it points to a very, very important trend, which is the explosive growth of commodities as an asset class. Throughout the ’70s, ’80s and even the ’90s, commodities were really the purview of extremely specialized asset management shops or extremely specialized commodity trading companies. The turning point was the dot-com bubble. After that, people started looking for other asset classes and they identified commodities as a new and coming asset class. And it was really supported by strong fundamentals with the rise of Asia, and the rise of emerging markets in general.
HAI: And how have ETFs played into that since they came around a little after that?
Bouchentouf: I think ETFs have played a critical role in the growth of the commodity story. I think unless you’re a specialized expert working in Chicago or New York, it’s very, very tough for you to get access to these kinds of commodity plays. But now you have several venues to choose from, like equities such as master limited partnership and other different types of vehicles. But I think ETFs have been a critical role in the democratization, if you will, of the commodities asset class. Previously, ETFs incorporated only a small number of commodities. Most of them would be in gold and oil, and maybe a combination of baskets. But now you’re seeing ETFs for uranium, you’re seeing ETFs for highly specialized, country-specific commodities like Colombia or Brazil ETFs. ETFs have played a very important role in allowing individual investors to access the commodities markets.
HAI: Let’s take a look at one example with silver ETFs. Over the last couple of weeks, we’ve had a little bit of volatility with silver. How has the difference between having that silver ETF versus a contract helped or hurt commodity investors?
Bouchentouf: We have seen a very interesting shift in silver ETFs. Since mid-2010 until about April, May of this year, there’s been an upward trend. It’s obviously taken a nose dive after that. I would say investors have to be cognizant that commodities don’t go up in a straight line. You’re going to see periods of volatility before you hit new heights.
HAI: And does the ETF protect you from that volatility?
Bouchentouf: I think the ETF can allow you to play that volatility. It depends if you’re specifically a retail investor; then, I think you have to be very careful, because you’re up against commercial players. You’re up against hedge funds. You’re up against a lot of professional players who have access to a lot more information. The ETF is more or less a passive type of tool.