liked the post in FT . i'm not really against raw materials, I am against naive arguments about
* all paper assets will die (futures are also a paper asset actually),
* any raw materials are limited therefore it will only rise in price (the likelihood of, that progress is always at a standstill 50% – or yes, or not, so this is not an argument),
* demand will grow and grow, until developing countries reach levels of per capita consumption of developed countries (interesting, and China has a chance to catch up with Britain in the sixteenth century in terms of firewood consumption per person?)
I guess,
* that everything is not easy at all, you need to weigh a lot for answers. offhand for any plus there is a minus and total uncertainty)
* for longran, something that generates income only as an increase in value – unacceptably.
* Spring 2008 of the year forever and ever traumatized my psyche for a long time with enchanting arguments in the growth of raw materials, so I have a full-fledged baes and fad here))
just the same, my opinion should not interest anyone, so a short summary of the note.
There are three arguments in favor of including commodity futures in institutional portfolios:
1) diversification
2) limited resources
3) inflation
Diversification.2008 year should have taught that, that diversification only works within trends, when the trend changes – we all grow together, we all fall together. There is a general rule – the more people diversify, the stronger the correlations become. Plus, the commodity futures market itself is usually understood too simplistically by investors and is also largely insider.
Limited resources. (the broader problem of supply and demand – they say, no matter how you think about it, the demand exceeds the supply in Longran). Don't forget about progress. Easy position only in long – is more than risky. Perfect wording (A simple long-only commodities position is a risky way to gain exposure to this trend – and naïvely assumes future demand is not already priced in.)
Inflation. Alliance Bernstein counted, what with 1900 the best inflation hedge of the year was platinum – with 2% annual real income, the average result of raw materials in general is slightly below inflation, and cotton and aluminum are generally in the red. Although, a commodity hedge can also be viewed as insurance – we don’t lose much in good times, but in bad ones we earn more.
Yes, this is undoubtedly true, that real assets do better under high inflation, than financial. Though.. Futures – these are financial assets after all;))
But the main problem for longran – this is contango. , the next July contract for wheat is now 458, the same but on 2010 year – 636 (almost on 40% more expensive). The example is clear enough, but there is still. S&P Goldman Sachs Commodity Index nearly doubled since 2001 of the year, but all the same through futures did not bring the same profit, more precisely, it did not bring profit at all, more precisely caused losses.
Continuing the old wisdom – the more investors" hedged against inflation through futures – the less protection they get. In longran.
