Mar

5

Rocky Humbert says: "Commodities belong in your portfolio when they are cheap and/or rising in price"

I agree. The question is are they cheap now? A very naive approach looking at Oil as a proxy for the group and compare it on a long term basis with stocks or bonds, you can say commodities are as cheap (relatively) as they have been in the last 20 years (bottom 10% of the range).

What other ways of assessing the 'value' of commodities are out there?

Alston Mabry adds:

The value of commods varies so much with the attention the sector gets, and especially when there is so much money sloshing around, looking for an "investment", or players stocking warehouses full of copper as collateral against shadow-banking-system commitments, etc. The situation introduces so many orthogonal drivers of price beyond mere end-user demand.

Alex Castaldo adds:

Here is a quote: "For commodities, we define value as the log of the spot price 5 years ago (actually, the average spot price from 4.5 to 5.5 years ago), divided by the most recent spot price, which is essentially the negative of the spot return over the last 5 years." (Asness, Moskowitz & Pedersen). So that is one possible definition, but I am not sure it is a satisfactory one since it relies only on price. To me value involves the comparison of price to something else.


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2 Comments so far

  1. Jeff Watson on March 6, 2015 6:05 am

    One of the many arrows in my quiver is to look at ratios of prices ie: wheat/corn, wheat/beans, corn/beans, CBOT wheat/Mgex heat, KC wheat/CBOT wheat, KC wheat/MGEX wheat. When combined with other methods, ratios can help confirm whether something is to cheap or expensive relative to the other commodity.

  2. Bryan284 on March 6, 2015 12:19 pm

    I view current oil prices as a reflection of the strong USD..

    I don’t think the right question is: “Are commodities cheap?”

    I think a better question would be: “is the cost of PRODUCING various commodities CHEAPER than in the past, or more expensive?”

    The answer to this may lead to a better buy/sell catalyst than simply looking at charts…

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