The Use Of Commodities Indices To Aid Portfolio Performance

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...As some inflationary fears developed so the commodities came into focus as a mechanism for hedging against inflation, both as a result of growing supply demand deficits along with academic research that points to the viability of commodities as a portfolio diversifier. This is particularly the case for gold...

In an analyst presentation on 1st February, Mr. Erik Kolts of DJ Index outlined the composition and use of commodities as an investment tool. Setting the scene he pointed out how in the 1980s we experienced a bull market for bonds as interest rates fell, while in the 1990s there was a substantial revaluation of the expectation for future corporate earnings, which when coupled with the Information Technology revolution generated a sizeable equity bull market. This ultimately brought with it, however, unreasonable return expectations on the part of a number of investors...

As some inflationary fears developed so the commodities came into focus as a mechanism for hedging against inflation, both as a result of growing supply demand deficits along with academic research that points to the viability of commodities as a portfolio diversifier. This is particularly the case for gold as exemplified by work done for the World Gold Council...

He argues that as an asset class, commodity indices have historical returns that are comparable to those of equities, but with lower volatility; furthermore that commodity index returns were negatively correlated to those for stocks and bonds while holding positive correlations with inflation measures.

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