Profiting from Commodities' Volatility

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Barron's argued a few weeks ago that ETFs are significantly contributing to the commodity bubble. These investment vehicles have given the average retail investor a chance to participate in a commodities rally, thus sealing its own fate - a rally has occurred while short term economic fundamentals have been weakening. Given the solid long term fundamentals and the weak short term economic fundamentals, there is no reason why these markets should be so immensely inverted. For example, oil deliverable in June 2008 is going for $115.35, while delivery in June 2011 is going for $105.84.

...Today I read an article entitled The Death of Gold which really got me thinking. As the author points out, the public being overly optimistic is generally a good sign of a bubble and particularly in the case of silver, all you hear is BUY BUY BUY likes its a sure bet. The same could be said for oil, wheat, etc...

Barron's argued a few weeks ago that ETFs are significantly contributing to the commodity bubble. These investment vehicles have given the average retail investor a chance to participate in a commodities rally, thus sealing its own fate - a rally has occurred while short term economic fundamentals have been weakening. Given the solid long term fundamentals and the weak short term economic fundamentals, there is no reason why these markets should be so immensely inverted. For example, oil deliverable in June 2008 is going for $115.35, while delivery in June 2011 is going for $105.84.

As interest in commodities climbs, so does Wall Streets' coverage and favorable recommendations to their retail clients. A company that I have the utmost respect for (as well as being a shareholder), is Goldman Sachs, a company who is very bullish on commodities. After the big sell-off a few weeks ago, Goldman commented that the dip was a buying opportunity and that those who buy and hold will do well in the long run. This sort of sentiment from such a successful firm adds to the lure for retail investors and can distort the reality. While Goldman may be over-weight commodities, they are not 'all-in' by any means. Although I am unsure of the actual numbers, this view could affect their portfolio by altering their asset allocation to 7% commodities from 5%*. Compare this to some retail investors who have over 50% of their portfolio in commodities and commodity related stocks.

Also don't forget Wall Street's role in the dot-com bubble, the housing bubble, the 1987 crash, (do I need to go on?). Sometimes the experts lose touch with reality or even cause the debacles themselves...

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