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 Investments in commodities include oil, natural gas, gold, silver, copper, etc.
A recent study by Ibbotson showed that the optimum allocation to commodities in an overall asset allocation ranged from 9.0% to 28.9%. According to finding posted on PIMCO's website, "The optimal allocation to commodities varied depending on the method. At the 10% standard deviation level a moderate risk level similar to a standard portfolio of 60% stocks and 40% bonds, the optimal allocation to commodities ranged from about 22% using the capital asset pricing model to as large as 28.9% using the building-blocks method. Even at the conservative 5% risk level, optimal allocations to commodities were relatively large, ranging from about 9% up to nearly 14%. Regardless of the method used in projecting future commodity returns, portfolios that included commodities in the opportunity set were also more efficient than those that excluded commodities, based on the Sharpe Ratio." More From PIMCO A World Shift You Need To Know AboutJim Rogers, in a Bloomberg audio interview, talks about the long-term shift of power from the United States to China and the effect on the commodities market as of October 2007:Bloomberg Audio - Jim Rogers On Commodities "Never before in the history of capitalism have commodities been as inexpensive compared to the CPI (consumer price index) or to financial assets (stocks & bonds) than they are now after a 20-30 year bear market. The current situation reminds me very much of 1969-1970, the eve of one of the greatest commodity booms. Commodity prices were then also very depressed (as they are today) compared to stocks, and experts argued that crude oil prices, which then were around $1.70 a barrel, would fall to less than $1.00 a barrel in the 1970s because the market was so glutted with supply. No one at that time could conceive that oil prices would approach $50.00 per barrel in 1980, and that gold and silver would rise by more than 20 times over a decade. Nor did anyone think that the US Dollar would decline by as much as it did. In those days, investors were still obsessed with growth stocks, which frequently sold for more than 50 times earnings (PEs of 50+), and they paid hardly any attention to the relatively low prices (and opportunities) in commodities."
Dr. Marc Faber
Stocks vs. Commodities - Are You Missing An Opportunity?
Energy Demand"Washington consultants PFC Energy figures the world is consuming oil at more than two times the rate of discovery of new supply. Conservation and efficiency gains have already saved billions, but they have not been enough to offset sharply rising demand from China and India."BusinessWeek, May 2006
In an article the appeared on Fool.com on January 9, 2006, Jeremy MacNealy did an excellent job highlighting some of the main reasons for investors to put both energy-related investments and gold-related investments on their radar. The following eight paragraphs are taken directly from his article.
"Recently, I had the opportunity to listen to Edward Morse, a former deputy assistant secretary of state of international energy policy, speak at Princeton University's Woodrow Wilson School of Public and International Affairs. One of the reasons Morse provided for today's energy situation, which he described as far more problematic than the one we faced in the 1970s, is the global phenomenon of urbanization, but particularly in China."
"Morse pointed out that the United States, which is considered a Western industrialized nation, currently has nine cities with populations over 1 million. China, on the other hand, is only 39% urbanized, but it already has 98 cities of over 1 million people. He added that the Chinese government has a plan in effect to increase its urbanization from 39% to 69% over the next decade. Unprecedented urban growth, along with inadequate operational refineries, is creating what he calls a crisis. Data from the International Energy Agency (IEA) validates Morse's analysis by projecting that China will increase its oil consumption by 7.2% in 2006."
"This follows a previous statement by Teng Tai, China's chief securities dealer, when he advised the country to increase its current gold reserve of roughly 600 tons to 2,500 tons in the near term and maintain around 3,000 tons over the long term. Gold speculators have anticipated such a move for some time, as China's current gold position is only 1.4% of its total foreign exchange reserve, according to figures from the International Monetary Fund. This percentage ranks it the lowest among the top 15 central banks with bullion reserves, according to a recent report from Credit Suisse First Boston. A move to 2,500 tons would make it the fifth-largest bullion holder, behind countries like the United States and Germany."
"For one, at no other time in the history of the stock market has gold been as accessible to armchair investors as it is today. The formation of superfunds streetTRACKS Gold (NYSE: GLD) and iShares COMEX Gold (AMEX: IAU) make it possible by a click of the mouse to designate a portion of your portfolio to the sole purpose of tracking gold prices. For example, since gold prices increased 18% in 2005, investors were awarded with an equal return by holding streetTRACKS Gold." "But these funds have another effect in that every investment dollar put into them is matched by its equivalent in gold. So, as more and more investors flock to streetTRACKS Gold, the fund, in turn, buys more gold, essentially increasing the metal's demand on the market. And just how high has the demand for this fund risen? Consider that over the past year its total net asset value has increased an astounding 27.8% to $4.9 billion." "China and individual investors, however, aren't the only ones eyeing gold. Economists have pegged other central banks like South Korea and South Africa as likely to increase gold positions. The Central Bank of Russia, for instance, recently announced that it plans to double its holdings of the precious metal."
Jeremy MacNealy U.S. Global Investors On Commodities:
Links to Commodity Articles & Research
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