Making a Case for Commodities

 | Jun 06, 2012 | 3:00 PM EDT
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The free fall of the last few weeks wiped out significant portions of the gains that stocks had accrued in the first four months of 2012. But the recent turmoil sent commodities deep into the red for the year. Most broad-based commodity ETFs have now lost between 5% and 15% on the year as jitters about the health of the global economy have weighed on prices.

Though many investors are running for the exits of risky asset classes, I believe that now is the time to beef up exposure to natural resources -- especially metals and agricultural commodities.

We're now acutely aware that demand from Europe will be soft for the foreseeable future, and expectations for U.S. consumption of raw materials have been tempered as well. But the case for commodities as an investable asset has never really centered around Europe or North America; in recent history, it's been an indirect play on emerging markets. And the building booms fueled by massive infrastructure investments are continuing in China and India, just as the demand for livestock and grains continues to climb as the middle class in those markets swells.

These trends, which have contributed to major rallies in natural resource prices over the last several years, aren't going to pause because Europe is having trouble paying its bills or because job creation in the U.S. is slowing down. Commodities have hit a speed bump in recent weeks, but before long, they will be back to full speed ahead.

There's another component to the case for commodities in the current environment: the currency impact. Commodities have been hammered lately in part because of a surging U.S. dollar. As the greenback has benefited from inflows as anxiety surged and investors sought out safe havens, the price of commodities was pushed down.

The PowerShares DB USD Index Bullish (UUP), which measures the performance of the dollar relative to a basket of developed market currencies, has added close to 4% over the past four weeks. But it's hard to see the dollar's recent rally continuing or even holding on to gains; there are simply too many factors working against the U.S. currency in the current environment.

I'm not one who believes the dollar is doomed. It will always maintain some safe haven appeal, and it will be a major global currency for the rest of our lifetimes. But it is also in a prolonged period of general decline, whether we care to accept that fact or not. And as that decline gets back on track after a recent detour higher, commodity prices will benefit. 

For establishing exposure to commodities, one of my favorite ETFs is a fund that gets relatively little attention from investors: the Greenhaven Continuous Commodity Fund (GCC). Unlike most commodity ETFs, which tend to be dominated by oil, GCC maintains a relatively balanced portfolio. Energy accounts for less than a fifth of assets, while agricultural commodities represent the bulk of holdings. In an environment where the technicals seemingly point to a decline in oil -- as I wrote about earlier this week -- a position in a fund such as GCC could sidestep the downward pressure on crude.

In the short term, commodities will probably exhibit high correlations to stocks and take their cues from the latest news out of Spain and Greece. So I can't promise that the road from here will lead straight higher. But I do believe that the recent selloff has created an attractive entry point for an asset class that maintains tremendous long-term potential and is positioned to continue to benefit from favorable demographic and macroeconomic trends.

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