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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* 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
This communication is for informational purposes only and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.