Commodities Have Been On A Wild Ride, Down 15% For The Year, But Drought Conditions Are Favoring Agricultural Funds

Thursday, July 26, 2012 09:24
Commodities Have Been On A Wild Ride, Down 15% For The Year, But Drought Conditions Are Favoring Agricultural Funds

Tags: commodities | Economic Outlook | economy | investing

Commodities investing is often considered high risk because of the volatile swings of the commodities markets. Currently, the Dow-Jones UBS Commodities Index is down 15% for the year in one of the asset class’s deepest hits.

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The slide is being blamed on the world-wide economic slowdown. Yet, over the past month, the index snapped back 10% because of diminishing supply of agricultural products due to drought. Extremely hot weather coupled with little rain is battering agricultural crops.
Some agricultural-based commodities funds have surged 25% as a result. Investors have to understand what drives supply and demand factors in commodities to understand the risk factors in investing. The unpredictable nature of the weather is a huge factor and can cause significant price swings.
On the other hand, like the equities and other markets, certain commodities may factor these swings in fairly quickly. Actively managed commodities funds may be a safer way to invest if the manager has skill and foresight.
PIMCO has a fund that is designed to invest in commodities-linked investments but it is currently invested in Treasuries because of the uncertainties in the commodities markets from the bearish global economic outlook.

Comments (2)

Interesting update Lisa. Thanks. In addition to demand-supply considerations, inflation should play a role in investor decisions. Real assets are an inflation hedge.
ronsurz , July 26, 2012
Thanks, Ron. I agree with your inflation comment. To me, just as with any other asset class, some diversification within the broad classification may be prudent. This doesn't mean overdiversification, it means balancing things like hedging inflation with the client's ability to live with volatility.

Skilled managers will also have enough foresight to gauge market factors such as the drought and the deep drop in returns for the year - from a broad investment management perspective, of course, not from a timing the market perspective.
lisagray , July 26, 2012

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