Inside Commodities: China And The Dollar

December 12, 2011

A rising China, a weakening dollar and other gold-tinted tales from the Inside Commodities conference.


Between China’s growing appetite for everything from oil to copper to corn, and with developed countries embracing easy-money policies that are weakening their currencies, investing in commodities looms largely as an inflation hedge in the uneven recovery since the market crash of 2008.

That was the takeaway from IndexUniverse’s 4th Annual “Inside Commodities” conference, held on Dec. 8 at the New York Stock Exchange. To be sure, there were some in attendance who didn’t think commodities should be considered an asset class, but they were clearly in the minority.

After all, the decade-long boom in commodities that has fueled a 600 percent rise in gold and a more than sixfold increase in crude oil has also given rise to dozens of commodity ETFs. Growing numbers of investors are embracing these ETFs as inflation hedges and as a way to diversify investment portfolios with assets not correlated with bread-and-butter investments such as equities.

Among the more popular ETFs are the $5.5 billion futures-based PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC) and the $71 billion physical gold fund, SPDR Gold Shares (NYSEArca: GLD). In all, more than $115 billion is now invested in ETFs, or 10.7 percent of all U.S. ETF assets, according to data compiled by IndexUniverse.

Of course, given all the uncertainty in the global economy these days, it’s hardly assured that the rally will continue, particular for certain agricultural economies such as corn. But even if the world heads back into recession, few attending the conference were prepared to say that the rise of China and emerging markets will somehow stop and reverse. Tread, but tread lightly, panelists seemed to be arguing.

“We cannot be too dogmatic,” Marc Faber, editor and publisher of The Gloom, Boom & Doom Report” said in a keynote address at the conference. “I am also interested in commodities in the long run, but there will be times when equities are better than commodities and there will be times when you have to move back into commodities.” Faber also moderated a panel on inflation.

Complicating matters is the fact that commodities don’t march in tandem. Faber rattled off year-to-date statistics that show how difficult it is to generalize about commodities.

He noted although the U.S. stock market, through all its volatility in the past year, has basically been flat, commodities have been a mixed bag. Examples he laid out included:

  • Crude oil, up 13 percent
  • Soybeans, down 17 percent
  • Wheat, down 21 percent
  • Industrial metals are mostly down: aluminum down 19 percent; copper down 19 percent, lead down 23 percent and nickel down 32 percent
  • Cocoa is down 24 percent, but coffee is up 10 percent
  • Some precious metals are up: gold has risen 24 percent and silver 7 percent
  • But other precious metals with industrial uses—such as palladium and platinum—are down, by 22 percent and 11 percent, respectively


The Case For Commodities ETFs

The good news for investors in commodities is that whether it’s over the past 10 years or the past 45 years, commodities have returns equivalent to equities. Also, their volatility is consistent with equities, according to Jeff Gaspar, a commodities and fixed-income portfolio strategist at Commonfund Asset Management.

Moreover, over most periods, commodities have low correlations with both equities and fixed income, partly because their prices are driven either by supply shocks or demand shocks, Gaspar said.

Broadly, it all adds up to commodities being a great inflation hedge, and ETFs have emerged in the past decade as tools that give investors a liquid investment vehicle in a pocket of the investment universe that has historically lacked liquidity.

“Gold is the prettiest of the ugly dogs in a crisis,” Gaspar said during the inflation panel. “You are basically talking about preservation of wealth, the storage of value." He added that energy is also a good inflation hedge and that industrial metals, which have benefited from Chinese demand, also do well in a rising economy.


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