Hot Commodity or Hot Topic?
Considerations for an Investment in Commodities
Research Paper, June 2007

In September of 2004, Plante Moran Financial Advisors published a research paper that discussed the impact of commodities on an investment portfolio and our rationale for not broadly recommending them to clients. Since the publication of that paper, PMFA has continued to study the commodities market, reviewing market developments, additional academic and industry research, and the potential benefit or detriment to our clients’ portfolios. Now, a little more than two and a half years later, we believe that it is once again appropriate to provide an analysis of the commodities markets.

Cyclically strong performance, increased accessibility to retail investors, renewed appeal of alternative investments in general, and their unique structure have again made commodities a popular topic of discussion for the financial media, academia, and investment managers.Much of this discussion has been based on the structure of commodities’ future contracts, which represent a more practical investment and provide additional benefits beyond a direct investment in commodities. In this paper, we begin with a basic discussion of commodities’future contracts, recognizing several innate differences between their performance and the performance of a direct investment in commodities. The paper then turns its focus to the fundamental characteristics of the asset class, such as the disparity between commodity supply and demand, the impact of large cash flows into the asset class, and the effects of geopolitical affairs. New research suggests commodities may be a viable diversifier for portfolios consisting of traditional assets, and the results of our prior recommendations are also discussed.

Based upon our research into commodities, our conclusion is that the cyclical outlook for the asset class remains unclear at best, suggesting that the current environment does not appear to present a favorable opportunity for investmentin commodities. Given that the apparent diversification benefits should be maintained by the asset class over the long term, we see no reason to initiate an investment in commodities until the cyclical picture improves. Instead, we will maintain a vigilant perspective related to commodities in an effort to identify a more attractive point of entry in the future.

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