Wikinvest Wire

The Money Magazine commodities indicator

Tuesday, May 06, 2008

When Money Magazine starts running stories like this one in today's Wall Street Journal, then you'll know we're a lot closer to the end of the commodities boom than the beginning.

Are Commodities Funds a Long-Term Bet? ($)
Global Demand Could Drive Sector; The Inflation Hedge
By DAISY MAXEY
May 6, 2008; Page C13

Commodity-focused mutual funds' incredible multiyear run is leading some investors to wonder how much upside could possibly remain, but strong demand for raw materials likely means these funds can deliver additional gains, at least longer term.

While the sector may be due for a correction in the next six months or so, global demand is expected to buoy the funds over the next several years.

"In the near term, it does look like it's run too far, too fast," said Mihir Worah, manager of the $13.9 billion Pimco CommodityRealReturn Strategy Fund. "But the longer-term picture is unchanged; commodities are going to do well over the next three, five, 10 years; in my mind, there's no doubt about it."
...
With inventories for many raw materials unusually low and strong growth in emerging countries, commodity prices should continue their upward trajectory, said Mr. Worah.

"There's too much demand from emerging economies for energy and metals, and not enough supply," he said, noting that creating new supplies involves long cycles.
...
Investors generally use these kinds of mutual funds to diversify their portfolios as the sector's performance is relatively uncorrelated with that of the broader market. But commodity funds can also offer a good hedge against inflation.
This is very matter-of-fact reporting in a manner that is very different from what you might read on the same subject in recent issues of Money Magazine.

And this is probably about as close as you'll every hear anyone in the mainstream financial media say, "Invest in commodtities - it's a good long term bet".

The question posed in the title was clearly answered in the affirmative within the story.

Recall that, like the delightfully memorable Time Magazine cover in mid-2005, Money Magazine also got on the housing boom bandwagon not long before it peaked a few years ago (see June 2, 2005- Money Magazine Does Real Estate).

Then they did a hasty dismount (see Sept 5, 2005 - Money Magazine Does a One-Eighty).

My guess is that, at some point, the nation's most popular personal finance magazine will grudgingly add "commodities" as one of their approved investment asset classes (with maybe a 15 percent weighting) and that will be the time to start thinking about selling everything you've got.

But, don't worry.

As explained in today's WSJ story, that won't happen until sometime in the next decade.

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4 comments:

Anonymous said...

My guess is that it will happen sooner than the next decade because of the excess liquidity out there and because it can move so fast to the next big thing -- a lot faster than the real estate bubble because commodities futures are easier and faster to buy than houses.

Anonymous said...

tim, does this mean you are turning bearish on commodities?!

Tim said...

6:42 - Yes, prices can move quickly but, new supply can not - that's the key. Look for government intervention in an attempt to slow price increases, but this is not a "market force" and can not solve the underlying supply/demand problem. In fact, it may exacerbate the longer term problem by providing short-term relief (see the "gas tax holiday"). Unless the Fed and the Treasury Department can start producing oil and other commodities, we're in for a long stretch of rising prices.

9:11 uh, no.

Greyhair said...

I think you may be a bit too optimistic about the length of a commodity bull market (except in oil).

But even if you are correct, I suspect we'll see much more volatility and mini-bubbles like we've seen recently as more and more people are drawn to the ease of investing in commodities these days. Put that together with a longish period of stagnation in the stock market, and certainly the volatility will increase with speculation moving money in/out.

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