Market News Commodities can give careful investors an edge |
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From a global perspective, investing in commodities is a sound long-term strategy. In the decades ahead, the world?€™s developing nations will demand more petroleum, minerals, metals and agricultural products, pushing prices higher. But an In fact, commodity prices fell sharply in early May due to concerns about the U.S. economic recovery, inflationary pressures in China and other factors. For instance, crude oil prices fell more than 10 percent following a substantial rise earlier in the year. Still, the long-term outlook for commodities remains positive. For filmgoers, one of the classic depictions of the commodities market came in Trading Places, a 1984 Eddie Murphy-Dan Akroyd hit in which the bad guys tried to corner the market on Florida orange juice, only to find they?€™d been snookered. Like most Hollywood movies, there was an element of truth ?€" and a great deal of fiction ?€" in profiling the commodities market. Today, investors can take similar high-risk strategies, such as buying futures contracts on agricultural products, gambling that prices will go up or down before those contracts come due. But there are plenty of other approaches to reduce the risks of commodities trading, such as investing in mutual funds, exchange-traded funds (ETFs) or separately managed accounts that look at a certain sector, such as oil and gas or precious metals, rather than betting everything on one commodity. In fact, putting 5?€‰percent to 10 percent of your portfolio into commodities can actually reduce your overall investment risk. That?€™s because changes in commodity prices are not closely coordinated with traditional investments like stocks and bonds. So, if there?€™s a bear market on Wall Street, commodities could still produce positive returns. For the next few years, commodities have the potential to deliver strong returns. One reason is that developing nations have weathered the recent recession and are expected to grow by 6.4 percent in 2011, compared with 2.2 percent for mature economies, according to the International Monetary Fund. That means stronger industrial demand from countries like China, India and Brazil. Demographic projections call for the world?€™s population to continue rising, reaching about 9 billion by 2050, with higher income levels as well. That is likely to increase demand for food products, as families add new foods to their diets. But before jumping into commodities, it?€™s important to understand this investment sector. For instance, perishable commodities are affected by weather and climate conditions. This includes grains, coffee, sugar, orange juice, cotton and livestock. While demand remains relatively steady, there can be an oversupply or undersupply in any given year. The forces affecting these agricultural markets are very different from those that impact oil and gas, copper, aluminum, zinc, tin and the lithium salts, a hot new commodity in high demand for battery manufacturers. These products are pumped or mined from the earth and have a relatively fixed supply. Wars, changes in governmental policies or environmental regulations can all affect petroleum and mineral commodities. That?€™s why gas today is substantially higher than it was just a few months ago. Another category is precious metals, including gold, silver and platinum. Here it?€™s demand that ebbs and flows based on investors?€™ perceptions of economic risks, while the supply remains relatively fixed. In times of crisis, many investors turn to gold as a ?€œsafe?€ haven for their money. In addition, gold, silver and platinum are used in jewelry and for industrial purposes. Recently, global demand has fallen due to Japan?€™s disaster-related economic problems. For investors, one of the most positive aspects about commodities is that they provide protection against inflation ?€" a risk likely to be a growing concern in 2011. Rising prices at the gas pump, for instance, need not be all bad news for an investor who holds shares in an oil and gas ETF. As with any type of asset, investors should use be careful about using leverage to purchase commodities. Buying on margin or purchasing options hoping for a market move magnifies the risks. For most investors, it?€™s far better to take a go-slow approach and use commodities as part of a balanced portfolio for the long term. ?€Š Andrew Menachem, CIMA, CWS is a wealth advisor at the Menachem Group at Morgan Stanley Smith Barney in Miami and Aventura and teaches at the University of Miami. Authors: Commodities - Yahoo! News Search Results |
