Why we should be investing in commodities?

16-Sep-2010

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An eternal optimist, Liu-Yue built two social enterprises to help make the world a better place. Liu-Yue co-founded Oxstones Investment Club a searchable content platform and business tools for knowledge sharing and financial education. Oxstones.com also provides investors with direct access to U.S. commercial real estate opportunities and other alternative investments. In addition, Liu-Yue also co-founded Cute Brands a cause-oriented character brand management and brand licensing company that creates social awareness on global issues and societal challenges through character creations. Prior to his entrepreneurial endeavors, Liu-Yue worked as an Executive Associate at M&T Bank in the Structured Real Estate Finance Group where he worked with senior management on multiple bank-wide risk management projects. He also had a dual role as a commercial banker advising UHNWIs and family offices on investments, credit, and banking needs while focused on residential CRE, infrastructure development, and affordable housing projects. Prior to M&T, he held a number of positions in Latin American equities and bonds investment groups at SBC Warburg Dillon Read (Swiss Bank), OFFITBANK (the wealth management division of Wachovia Bank), and in small cap equities at Steinberg Priest Capital Management (family office). Liu-Yue has an MBA specializing in investment management and strategy from Georgetown University and a Bachelor of Science in Finance and Marketing from Stern School of Business at NYU. He also completed graduate studies in international management at the University of Oxford, Trinity College.







Why we should be investing in commodities?

The most important reason is not only diversification of asset classes in a total return portfolio, but also the uncorrelated nature of the asset classes. Commodities tend to be less correlated with other traditional asset classes such as equities and bonds.  Gold has positively outperformed the equity markets over the past 10 years while the US stock market has achieved only negative returns.

But be careful, some commodities may have a higher correlation than other commodities and are not influenced by different factors.  Precious metals tend to be a play on the crisis of confidence in the fiat currencies due to global competitive debasing of currencies and high government budget deficits.  Industrial metals will be more closely correlated with global trade and manufacturing activity.  Keep a close eye on the Baltic Index or the China PMI.

In terms of energy commodities, it is driven more by industrial activity and consumer consumption as well as other built in risk premiums for war, supply disruption, and political risks. China as the world’s largest energy consumer will also impact energy commodity prices.

In addition, some commodities have higher return potential relative to other commodities.  Silver appears to have more room to run than Gold.  If historic Gold/Silver ratios return to historic averages silver should outperform Gold as the Gold/Silver ratio reverts to the 50’s from the current 60’s.

Also, current agriculture prices when compared to its historic highs appear to favor soft commodities.  With many key long term catalysts such as global warming, change in emerging market consumer tastes and preferences on diets, urbanization, lack of arable farm land, population growth, diversion for alternative energy use, and lower water supplies all point favorably to much higher soft commodity prices long term.

A simple and efficient way to invest in commodities rather than pick individual commodity companies, etc. is to buy ETFs.  Please review our free ETF Lists which will provide a list of ETFs by asset classes.  Commodity ETFs can be played either individual commodities or baskets of commodities.

Best Wishes,

Liu-Yue (Louie) Lam

Co-founder and CEO, Oxstone Capital Management


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