Friday, September 01, 2006
Long time reader George left a comment that it might be time to get out of commodities in response to my Commodity A Go Go piece from yesterday.
In the past when there have been commodity super cycles, big declines have been part of the bargain so from a trading standpoint George could easily be correct. Also more to his point this rollout is a lot of supply of product which offers a potential warning.
I slipped something into that last paragraph that may not be correct; this may not be a super cycle for commodities I don't know.
My writing on this topic has been consistent from the start. Gold has a place for its usual disaster insurance and low correlation to equities. I own lumber, through Plum Creek Timber (PCL), for the correlation aspect as well.
I can see future utility for the industrial metal ETF and the agriculture and soft baskets could benefit from big, slow gradual shifts in global demand.
For perspective, GLD has a 3% weight for most clients, PCL is 2-3% and if I ever go into the metals or either food-related commodity basket they would probably be 2% each. This adds up, at most, to 10% of assets in a category that cannot go to zero (PCL noted as an exception), although I doubt I would have that much.
For me the thing is diversification more than anything else. I started writing about gold for the reasons above, very early in the move. I'll write about it in the same way when the spot light moves away from gold.
I was not necessarily right about gold. I expect that if gold had not generally done well in the last couple of years there would have been other parts of the market that would have done well. I'd own those parts too because that is what being diversified does, gives you exposure to what is working. It also gives exposure to what is not and correctly analyzing between the two is hopefully how you add value to your portfolio.
Tomorrow we go twelve miles.
Posted by Roger Nusbaum at 12:49 PM