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Inside Commodities: China And The Dollar

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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 4 th 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

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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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The Counterargument

Not everyone buys into the view that commodities constitute a separate asset class, particularly when it comes to investing in futures—and even when that futures exposure is wrapped up in an ETF.

“You do not invest in commodities, they are not an asset class,” Dennis Gartman, a longtime macro trader and editor and publisher of the “The Gartman Letter,” said during a panel on inflation and the dollar.

“What people forget in the business of the futures markets is that, first of all, it is a zero-sum game,” said Gartman. “There are no net winners—for every long there is a short—it is not the same in equities.”

Asked what die-hard investors are to do to get exposure to commodities without some of the dangers of getting that exposure on their own, Gartman said:“Get a hedge fund to do it for you.”

Gold And Beyond

If there is a sure thing in the commodities space right now, it seems to be gold.

The yellow metal has been a reliable store of value for thousands of years, and the uncertainty in the global economy in the past few years has put it and other precious metals in the spotlight.

Much in the commodities world depends in the near term on how China’s efforts to control its growth play out. Commodities that are already in tight supply—such as corn, beans, copper, and crude oil—are vulnerable to further spikes. That means that even if growth levels off somewhat in emerging markets, their relative tightness affords them each a bit of downside protection.

Oil, still the lifeblood of the global economy, looks likely to slowly rise, though a renewed spike could easily be severe enough to put a serious damper on economic growth, David Greeley, chief commodities strategist and head of energy research at Goldman Sachs said.

“Is the market, by trying to avoid the spiral down in demand due to Europe, setting up to hit the rocks of supply constraints?” Greeley asked during a panel discussion on the energy outlook. “If you do have that price spike, how high do prices go before they hurt the economy?”

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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