Daily Gains Letter

Time to Add Commodities to Your Retirement Portfolio?

By for Daily Gains Letter | Apr 17, 2013

170413_DL_whitefootIn an effort to reduce volatility and protect their investments against the rising cost of living, many investors add commodities to their retirement portfolios. That’s because a large number of commodities are influenced by inflation well before it impacts the overall economy.

The perfect reflection of supply and demand, commodity prices climb when there is strong demand and taper off when the economy is doing poorly; in the latter case, the future looks bleak.

Gold prices collapsed earlier this week, suffering their sharpest fall in 30 years. Silver is also down; so, too, is copper, oil, lead, aluminum, corn, wheat, soybeans—simply put, commodities are getting hammered.

It’s not as if there isn’t news to support the decline in commodities. The U.S. has seen a raft of negative economic news trickle in. April consumer confidence levels fell from 78.6 in March to 72.3—its lowest level in seven months. (Source: Smialek, J., “Consumer Sentiment in U.S. Declines to a Nine-Month Low,” Bloomberg, April 12, 2013.) U.S. retail sales fell 0.4% in March—the largest drop in nine months. (Source: Kowalski, A., “Retail Sales in U.S. Decline by Most in Nine Months,” Bloomberg, April 13, 2013.)

Weaker-than-expected growth in China, Asia’s largest economy, is weighing on global sentiment. China’s economy expanded just 7.7% during the first quarter, below the forecasted eight percent. Industrial output was expected to expand by 10%, but it only climbed 8.9%. (Source: “Market Buzz: Negative outlook on weak data from China,” RT web site, April 15, 2013.)

And conditions in the 17-member eurozone are still dismal. Joachim Starbatty, one of Germany’s pre-eminent economists, said he wants to see the dissolution of the eurozone, arguing that Europe is being dragged under by debt-ridden countries. Instead of giving countries like Greece, Ireland, Spain, and Italy the boot, it would be better for Germany to leave. (Source: Connolly, K., “Leading German economist calls for dissolution of eurozone to save EU,” The Guardian April 14, 2013.)

Another, lesser-known indicator of economic instability is the rise in the number of analysts who are saying that this time is different; the reason, according to UBS analysts, is that “commodities are not a leading indicator in the current context.” (Source: “Commodities are usually good economic indicators—just not right now, says UBS,” MarketWatch April 5, 2013.)

If you’re looking to hedge against inflation, you have to be wondering if now is the time to add copper, silver, oil, corn, or another commodity to your retirement portfolio.

The S&P GSCI Commodity Index is one of the most widely recognized global broad-based benchmarks. The index has slipped seven percent since the beginning of January and is down 11.5% since September 2012. It’s also down 21% over the last two years and is still down more than 53% since hitting record highs in 2007.

PowerShares DB Commodity Index Tracking (NYSEArca/DBC) has $6.8 billion under management, with an expense ratio of 0.93% (or $93.00 for every $10,000 invested). It is also trading down 5.2% since last year.

iPath DJ-UBS Commodity Index TR ETN (NYSEArca/DJP) has nearly $1.9 billion under management, with an expense ratio of 0.75% (or $75.00 for every $10,000 invested). Over the last 12 months, it has slipped by four percent.

With negative economic news streaming in, it’s tough to say how much further commodities can fall, and what a commodities rebound will look like.

Regardless, it’s important to remember that commodities perform well during periods of inflation. While we aren’t experiencing sky-high inflation right now, government debt and quantitative easing are setting the stage.

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