I want to implore folks to take another more serious look at commodities in 2008. The whole asset class is being affected by key mega-trends -- with major implications for your portfolio.
You'd have to be living in a cave not to know that all the major commodities have made tremendous moves to the upside this year, continuing a multi-year trend. Oil, gold, wheat and platinum are all trading at all-time highs. Last week I read a report about the new highs seen in the cash market price in rice. Rice! Look at the CRB index chart. If ever a picture tells a thousand words, it's this one.
The primary catalyst most discussed for this price in commodities has been the ever-weakening dollar. As the greenback has continued to lose value against other foreign currencies, the costs of commodities priced in dollars have risen to represent a constant value over time. In addition, investors looking for a safe haven from the dollar's devaluation have renewed an old standby strategy and have run to raw commodities, particularly precious metals.
But even more importantly, as I believe, and as I outlined in a column written last November, commodities have become an entirely new set of asset classes.
Institutional and individual investors are still learning that they need exposure to these new asset classes to create correctly allocated portfolios. And while there are over 2,000 stocks to look at on the NYSE alone if you want exposure to equities, there's really only one gold contract. No matter how you slice it, there's a lot of fresh money moving every month into very few issues.
Commodities futures, remember, are not like stocks. There's no fixed number of shares for buyers to chase. In commodities, if you can find a seller at a price, you instantaneously create a fresh "share" of a commodity contract by executing the trade. That continued search for legitimate sellers has, by itself, been a major upward pressure on prices.
In theory, the number of open contracts in any commodity can expand forever to accommodate appetite. The volume and open interest numbers at all the major commodity exchanges over the last year indicate that this appetite is huge and continues to grow exponentially.
Once you've decided to participate, there are four common ways to gain exposure to the commodities markets.
First, you could open up a futures account and outright buy the CRB index on the NYBOT or the GSCI index on the CME and look to roll those contracts as time progresses.
Second, you could invest in commodity funds that trade the entire basket of futures markets, although many of these have large initial subscriptions and others, like the Rogers fund, have large extra fees to trade them.
Third, you could invest with a managed futures fund. These funds often sport high subscription minimums as well. Moreover, they take biased positions in commodities, trying to beat the basket index's performance over time, much like other managed funds. While many of them succeed in this fast-growing approach, you also run the risk of having a very bad stretch with a 'cold' group - not precisely what you might be looking for if you are just seeking generalized commodity exposure.
Lastly, you could look to buy stocks that mirror commodity price movement. For example, you can buy shares of an agriculture equipment maker if you are bullish on grain prices. These stocks might lag the actual performance of commodities, they can still post strong gains as the underlying commodity rallies.
If you have enough money to meet the minimum costs, and are in it for the long haul, I'd recommend the commodity funds. If you cannot make minimums or are more apt to trade around the commodity space, the commodity-related stocks approach can still be a very useful approach. Back in November, for the same reasons I outline here, I recommended a pair of metals stocks: Yamana Gold
(AUY)
and Southern Copper
(PCU)
. They have done extremely well and I see no reason to come off these recommendations today.
Oil stocks, while a favorite of many analysts looking for commodity exposure, are not a favorite of mine. In my next column, I'll tell you why and where to go to get quality exposure to the monumental rise in oil prices.
None of the rationales I've discussed here look to be shifting yet. In fact, many of these trends look like they've really just begun. It's hard for me to believe that the lofty CRB index represents a 'bubble' f any kind and the bull run in commodities looks set to continue for quite a while.
Therefore, if you haven't yet gotten exposure into the commodity space yet, I'm recommending that you go out and get some. And, if you're already invested in the space, I'm convinced that you'll probably need to increase your exposure to at least 10% of your investable portfolio to be correctly allocated and take advantage of this rare bright spot in today's markets.
At the time of publication, Dicker did not hold any positions in the securities mentioned, but positions can change at any time.Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser. Dan's recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts; fundamental analysis including supply and demand statistics (DOE, EIA), CFTC trade reportage, volume and open interest; technical analysis including trend analysis, stochastics, Bollinger Bands, Elliot Wave theory, bar and tick charting and Japanese candlesticks; and trading expertise in outright, intermarket and intramarket spreads and cracks.
Dan also designed and supervised the introduction of the new Nymex PJM electricity futures contract, launched in April 2003, which cleared more than 600,000 contracts last year alone. Its launch has been the basis of Nymex's resurgence in the clearing of power market contracts over the last three years.
Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts as an analyst of the oil markets on CNBC, Bloomberg US and UK and CNNfn. Dan is the author of many energy articles published in Nymex and other trade journals.
Dan obtained a bachelor of arts degrees from the State University of New York at Stony Brook in 1982.
