Commodities in your Portfolio

By ,   June 16, 2014

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Diversification is harder and harder to come by these days as globalization has integrated world markets.  Still, commodities remain a source for diversification, especially if you look beyond generalizations of commodities being defined as just oil and gold.  When you include agricultural commodities, and drill down into the actual supply and demand metrics for a specific commodity; it is much easier to find commodities with a low correlation to the broader equity markets.  

Investing in commodities brings a whole new set of factors for consideration when evaluating them for a portfolio.  Commodity prices react more to “supply shocks” than demand changes.  The challenge here is such shocks are nearly impossible to predict as many are based on weather patterns or other such macro events.  As news hits of these events, commodity markets can move quickly to account for the new information.  

Still, as we believe, investing is about managing probabilities.  If more and more data support an appreciation in price of a commodity over time, adding such an asset to your portfolio can present a great opportunity to increase return while moderating risk.