Oil is not the only commodity that has seen prices soar this year, handing big profits to investors. As of late June, even after a pullback over the UK vote to exit the European Union, oil was up 80% from its low point in late January. Since the beginning of this year, soybeans were up 35% and sugar 29%. Gold was up 24% and silver 27%.
Of course, those gains were coming off deeply depressed prices. Commodities entered a bear market in mid-2008. When prices of raw materials drop extremely low, it’s not surprising that they tend to rebound some. During the 2002–2008 commodity bull market, the Bloomberg Commodity Index rose 172%. But can the current recovery lead to further gains? The gains this year are fueled partly by slightly greater demand for raw materials in China, as well as a weakening US dollar following a long stretch of rising dollar values. Various commodities are denominated in US currency, so when the dollar loses value, commodities tend to rise.
As for gold, investors regard it as an alternative to government bonds, which in some countries now have negative interest rates, meaning that you have to pay to park money in them.
My take: To see a sustained bull market in most commodities, the global economy needs to grow faster than it has been. But we have likely seen the bottom in commodity prices, so now still is an attractive entry point for investors. Adding a 5% exposure can diversify your portfolio.
Recommended: WisdomTree Continuous Commodity ETF (GCC), an exchange-traded fund (ETF), gives equal-weighted exposure to 17 different types of commodities…Power-Shares DB Commodity Tracking ETF (DBC) is a bigger bet on oil-related -assets, which make up about 50% of the portfolio.