News Wrap - Is Now the Time to Invest in Commodities?
A recent article in the Wall Street Journal* suggested that now might be the time for investors to invest in commodities, particularly as part of a longer-term strategy such as a retirement plan, perhaps. The article stated that the best time to invest in an asset class is typically when its performance is at its worst. Given the recent and extended travails of commodities, it contended, they currently make for a potentially attractive prospect.
Commodities are raw materials that are either consumed without processing or are used as the foundations for other products. Examples of commodities range from timber, oil, nickel, gas or gold, to oranges, corn, coffee wheat, cattle and sheep.
Commodities play a major part in economic signalling
The price of commodities has pretty much been in perpetual nosedive since the most recent financial crisis and, in a way, this is good news; downward pressure on commodities prices is a sign of increased productivity. However, on the flip side, such downward pressure can result in the collapse of commodities industries as increased competition leads to mines, farms and other businesses struggling to meet overheads and ultimately going out of business.
In turn, this can lead to food shortages, commodity price rises, and a rush on investors looking to get a foothold in the commodities markets. So, goes the rationale, what better time to buy than when commodities are cheap, both historically and relative to other assets such as stocks and tech?
However, despite the many things to recommend this approach, some analysts believe that, at this present time, it may be too early to invest.
Commodity prices do not move in line with stocks and bonds, tending instead to perform exceptionally well for clusters of at least several years and then going through similarly dramatic and sustained bear periods.
For example, so far in 2019, The Bloomberg Commodity Index is up 1.7%; the S&P 500 SPX is up 24.5%; the Dow Jones Industrial Average is up by around 20%; the S&P 500 is up by 16%; and the Dow is up by around 12%. In contrast, the commodity gauge has fallen 8% compared to its level a year ago.**
Put simply, it is impossible to predict just how long commodities will remain in their current bear cycle and, against this background, no one should be staking all or a large portion of their retirement plans on the future of commodities.
It's not that they don't have a role to play in a retirement investor's portfolio, but in reality they should only ever form just one part of a healthily diversified spread of assets.
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Disclaimer: The provision of information in this communication is not based on your individual circumstances and does not constitute investment advice. Blacktower makes no recommendation as to the suitability of any of the products or transactions mentioned.
* https://www.wsj.com/articles/its-slow-going-but-stuff-like-wheat-and-oil-can-spice-up-your-returns-11574437225 Accessed 29-11-19
** https://www.marketwatch.com/story/the-supercycle-bear-market-in-commodities-still-has-years-to-run-wells-fargo-2019-11-19 Accessed 29-11-19