The Case (or not) For Commodities

July 25, 2007

I read with interest Matt's latest report on contango. And I started to think about commodities.

Though commodities seem to be everywhere now, all of this commodities investing in the asset allocation sense is a relatively new phenomenon.  Even large institutional investors have only really begun looking at commodities (and more broadly "alternative asset class investing") in the last 10 years or so. 

Real estate is the latest investment area to be elevated to an "asset class" and Emerging Markets were before it.  Commodities really do seem to be reaching that stature to me.  Hedge funds may not quite make it. What's next, microfinance?  They do say that small and value is where you get your correlation benefit now abroad, and it's harder to get smaller than micro.

Back to commodities, though.  The irony of all of this trumpeting of commodities as an asset class is that the asset class' strongest suit - very low correlation to equities markets - has gone out the window the last few years.  But intuitively and in less, well, odd markets than the ones we're in now, one would think that tradition will eventually hold.

On the market timing side, there's been a TREMENDOUS runup in commodities, but there are plenty of people who think that we're only at the beginning of a "super cycle" of commodities growth. I'm not sure that I'm one of them.

It's easy to be enthusiastic.  I mean the basic story is very compelling.  It's essentially oil's story: We're running out of oil.  Oil is a key driver to global economies.  China and other emerging markets are booming and will be driven by oil (and other commodities) so the prices can be going nowhere but up. Well that's the story.

Remember the oil shocks in 1973 and the 1980's?  I then also remember oil going back to below $10 a barrel. So commodities, like the economy, runs in cycles.  The question is whether commodities as an asset class have any real returns.  Aluminum is not working or growing, so where does that RETURN come from?

Rick Ferri has a nice post on this right now on our discussion board.  And if you're really interested in commodities, check out a site that we run for Van Eck: http://www.hardassetsinvestor.com/  It has a ton of great commodities and "hard asset" (real estate is also a hard asset) information.  I don't mind saying it's a great site. 

 

 

 

 

 

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