In the last month the volatility in the stock market has been greater than it has been for some time, we have seen three figure up and down days regularly. In an environment such as this it is easy to understand why some people lose sight of the macro environment. If we look at what is actually happening in the world then it becomes a bit more obvious the the areas we could consider investing in. One investment area that has been consistently on the up over the last few years is commodities.
Most commodities have performed extremely well over the last few years, the obvious ones like the precious metals we are fully aware of, some of the less well known is commodities are also doing extremely well. The question is can we take advantage of these also. For many years I traded commodity futures this is definitely not a market for the fainthearted, but until recently was the only way that most people could invest in things such as Corn, Wheat, Cotton and Coffee. In the last little while however ETF's that invest in these commodities have become available. It is now possible to buy, ETF's that follow the price of individual commodities such as the ones I have mentioned earlier, in fact ETFS securities in London allow you to buy ETF's that track pretty much any commodity that is traded on the futures exchanges including things such as Live Cattle and Pork Bellies.
With the increasing affluence in countries such as India and China we are seeing unprecedented command for all commodities, not just the Base metals for construction and infrastructure but foodstuffs such as sugar , and wheat.The demands being placed on these crops are such that we are starting to experience real pricing pressure on a lot of our staple foodstuffs.This pressure is unlikely to go away and in fact is likely to increase as these markets demand more and more of the types of food we eat and take fro granted in the west e.g. Chocolate, Refined sugar products breakfast cereals etc.An other pressure on crops such as corn will be the increased demand for meat and poultry, it takes a lot of corn to feed livestock and as demand for meat products increases then there will be a subsequent demand for feed for them.
One of the best performing ETF's this year is the Powershares Agriculture ETF (DBA ) it is up around 30% this year already
This trend is likely to continue for a good while yet as the demand for agricultural commodities is far outweighing the supply, I recently bought the DBA again(the Green B on the chart) and intend to hold it for the longer term.The other ETF's that I like are in Cotton (CTN) Sugar (SUGA) and Coffee (COFF). Coffee and Sugar have run up quite fast of late so I am waiting for a pullback to enter these but have recently added the cotton ETF as I think we may see Cotton breaking out sometime soon.
I will talk in a bit more detail about some of the other ETF's that are available in Oil etc in a subsequent posting, but if you are not too keen on trying to pick an individual commodity there are some good baskets that you can look at DBA is one as is AIGG (Grains) AIGS (Soft's-Sugar, Cocoa etc). Another very interesting basket to look at is the Rogers Commodity Index, which is a basket of commodities that tracks picks from Jim Rogers of Quantum Fund fame, Jim has been singing the praises of commodities for many years now and as in the past has proved to be very accurate in predicting Macro trends to invest in.The table below outlines what is contained in the RJI Index and the percentages of each commodity it holds.
This will give you a broad exposure to pretty much all commodities and is a great way to gain exposure to these markets, Jim reckons we are still only midway through this commodity bull cycle and sees another 5+ years or so before we risk reaching a top.This could be one to add to your portfolio and top up pullbacks. Certainly I am of view that in the 2-3 years most if not all commodities are likely to definitely outperform the stock markets and also probably prove less volatile. I currently am holding a lot in the commodity sector and will be adding to my holdings on weakness.
If you want to learn more about Jim Rogers views on the markets I highly recommend any of these books he has written, they are not only highly informative but also a good and easy read.
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