Commodities As An Asset Class

Newsclips — August 29, 2008

By Gregory Blaha

The Wall Street Journal – Common Myths About Commodity Investing There is a theory that has been doing the rounds that ordinary investors need to have some direct exposure to commodities like oil, copper and wheat through the futures market. It’s nonsense. Commodities are far more dangerous investments than stocks, shares, or even real estate.… Continue reading Commodities As An Asset Class

  • The Wall Street Journal – Common Myths About Commodity Investing
    There is a theory that has been doing the rounds that ordinary investors need to have some direct exposure to commodities like oil, copper and wheat through the futures market. It’s nonsense. Commodities are far more dangerous investments than stocks, shares, or even real estate. The prices are incredibly volatile. They can spend years, even decades, in terrible bear markets. Through the 1980s and 1990s, many fell by two-thirds or more. And an ounce of gold or a pound of copper, unlike stocks and bonds, doesn’t even pay interest or dividends as you go along. “Diversification” does not mean you have to blow part of your retirement plan on dangerous bets at poor odds just because some other people are.

Comment We wrote about the idea of commodities as an asset class in an April 2005 Market Fact:

Diversification is a laudable goal for investors, but the literature is notably silent on whether an index should be internally diversified. This is implied by the numerous negative correlations within the CRB index: No investor can be certain whether a long position in this index contains a number of components working against the overall position, nor can an investor be certain of any internal stability within the index portfolio.

Given this refutation of an index’ existence, we recommend those who wish to partake in any bullish move in a commodity trade that commodity as such. A long position in crude oil can stand on its own merits unencumbered by cocoa or orange juice.

We also wrote about gold as a long-term investment in a May Market Fact:

While we have been positive of gold many times for a short-term trade, the mathematics of compound interest argue against a long-term commitment: Assets earning compound interest over time outperform assets whose holding costs compound over time.