Review: Commodities Rising
Every Friday Free From Money reviews a book you might find useful
Over the past few years commodities have earned a reputation as being high flyers for investment portfolios, mostly due to the belief that developing countries are going to use more and more resources. In this book author Jeffery Christian attempts to dispel the rumors that exist in the commodities markets, as well as offering thoughts on how to make money whether markets are going up or down.
Here is a quick walk through Commodities Rising:
Chapter 1: The Commodities Rush Is On
The first chapter sets the stage for the rest of the book, explaining why the author felt a need to write this book. Since 2003 there has been a large run up in the price of commodities, thanks to increased demand from both developing economies and from increased investor demand. Investors have piled into commodities in the past few years for various reasons which are explained in later chapters.
Chapter 2: Myth of the Commodities Super Cycle and the Chinese Consumer Giant
The super cycle theory puts forth that there will be an extended run in commodities, potentially lasting for over a decade thanks to the rapid development of countries like China, India, and Russia. Furthermore, new production of in-demand commodities can’t come on fast enough, which will drive prices even higher.
The reality, according to the author, is that these countries are not using raw materials nearly as fast as the investment community believes. On top of that, despite the rapid growth in incomes, per-capita incomes in the developing countries is still extremely low. In 2007 China’s per-capita GDP was $5,400 a year, versus over $45,800 per year in the U.S. These are not the kind of numbers that you would expect to support gold at over $1k an ounce
Chapter 3: Commodities and the Global Economy
Chapter 3 examines the relationship between commodity prices and economic indicators. Commodities are often used as an indicator of inflation expectations and economic activity levels, whether those relationships are valid or not. The author jokes that gold has forcasted 13 of the past 3 bouts of inflation, and that commodity prices have a complex relationship with economic output levels that go beyond a simple ratio or formula.
Chapter 4: Commodities as an Asset Class
Ever since David Swensen revealed the secret to his returns on the Yale endowment portfolio, commodities have become known as an acceptable asset class for a well-diversified portfolio. Commodities have a low correlation with other assets like stocks and bonds, which has the potential to smooth out returns in a portfolio.
Chapter 5: Commodity Investment Vehicles
There are many ways to invest in commodities, including forwards and futures, ETFs, mutual funds, and hedge funds. Chapter 5 briefly covers these investment vehicles, and gives some of the pros and cons of using them. For example an investor can gain more leverage using futures, or they may prefer to hold the physical asset if they are investing in precious metals.
Chapter 6: Commodity Strategies
Once you’ve learned what tools you can use for investing, you will need to learn some techniques for applying them. A few ideas are covered, including using the Commitment of Traders Report to get market insight, using principal protected accounts and structured products, and why you shouldn’t use ratios as a trading tool.
Chapters 7 - 11
The next 5 chapters describe the different types of commodities that are typically invested in, including precious metals, base metals, energy commodities, and agriculture. Each section contains a brief history of the commodity, historical price movements, a look at the supply and demand factors, and the common ways people invest. Precious metals, for instance, are often held by investors in physical form. Natural gas traders on the other hand will probably not want to store a highly explosive gas in their backyard, and thus futures, options, and equity investments tend to be a more practical route.
These chapters could be very useful for someone just getting started in commodities but is unsure where exactly they should start.
Chapter 12: The Fundamentals Still Apply
No matter what hype you hear on the news or in the financial press, prices are still driven by basic supply and demand. There may be short term swings one way or another due to speculation, but in the end understanding market dynamics is the key to long term success. This chapter attempts to help you clarify what you should think about when looking at supply and demand. For instance, does a particular supply number include recycled materials?
Recommendation:
If you’re considering adding commodities to your investment portfolio then Commodities Rising should be on your reading list. Taking a few hours to read this book could save you thousands of dollars, no matter what side of the trade you decide to take.
Once you’ve become familiar with the basic hedging strategies suggested in this book you will likely want to find out more from another more advanced book. But this book should get you going in the right direction.
