This is not to say that this asset class has not produced a spot in a well-diversified portfolio. It has. At a time when stocks and bonds are forecasted by most academics and investment gurus such as Warren Buffet, Bill Gross of PIMCO, and Jeremy Grantham of Grantham, Mayer, and Van Otterloo, to produce 5.0% returns or less over the next decade due to historically high market valuations. With commodities being economically priced, substantial upside potential is possible inflation is historically low right now but with the effects of massive fiscal and monetary policy colliding with expected interest rate increases and already robust consumer spending, undoubtedly raw goods prices will inevitably increase. When they do, commodity indices will no doubt follow suit. As inflation gradually rises in 2009 and 2010, industrial metals prices will increase as investors begin to direct large amounts of money into these hard asset commodities. The high correlation between commodities and inflation provide an significant hedge against considerable losses in traditional financial instruments such as stocks and bonds.
Commodities also provide a strategic play on the current weakness in the Dollar. As other currencies such as the Euro and Yen appreciate versus the dollar, foreign buyers can buy fewer goods with the same amount of currency. This artificially raises demand, and subsequently drives up the prices of commodities. Currently, effects of this phenomenon can be seen best in the gold and silver markets as prices have increased dramatically over the past year.
Commodities provide a play on globalization by their ability to aid in the improvement of the worldwide economy. This is due to the fact that prices for industrial materials will rise as demand for industrial goods increase. As countries such as China and other emerging market economies develop, they will need more raw staples. This is very true for industrial metals. China continues to expand at a rapid pace and consequently, their demand for raw materials continues to rise. In fact, China’s iron ore demand has enlarged from 5% of the world’s supply to almost 50% over the past twelve years.
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