Commodities Still Bubbling
The following graph showing the relative size of the actual commodity and futures/derivatives about the commodity. As you can see, the futures market exploded over that last few years. This is why I say that the historical returns and lack of correlation of the commodity market is a thing of the past. At this point there is so much investment money (as opposed to hedging money by commodity consumers) going into this market that its correlation and volatility are going to rise substantially.
Furthermore, contango (when future prices are higher than spot prices) is going to be much more common than in the past which creates a drag on performance. To see how bad this can be check out the following chart which shows spot oil prices versus an OIL ETF which is using futures. The difference in performance is because of contango in oil future contracts.
So at this point, I reiterate my recommendation to look elsewhere for alternative investments. Unless you can time the bubble properly (and who can promise that?), this will probably not provide investors what they were hoping for.
This entry was posted by David on May 8, 2010 at 10:09 am, and is filed under Investing. Follow any responses to this post through RSS 2.0.You can leave a response or trackback from your own site.