Commodities in the Portfolio

In a recent post we discussed commodities and their place in a diversified long term portfolio. This is something many advisors recommend, and as do I. Edward Harrison has an must-read article which includes a chart by David Rosenberg, showing the recent correlation between Chinese stocks and commodity prices.

With the FXI (China 25 index ETF) having broken down out of its uptrend, this correlation suggests what we are seeing now: a heavy selloff in commodity ETF shares (gold is another matter), which is how a majority of individual investors would hold this asset class. The 40% Aussie govt tax hike on commodity producers can’t be helping the situation. Now to be sure, there is a general risk aversion trade going on in the markets, but it doesn’t necessarily negate the correlation Rosenberg found. Ergo this may be a good time to lighten up or be altogether out of commodity ETF allocations.

Note: within a portfolio, I don’t believe any allocation should be buy and hold no matter what. Once again, rule #1 is don’t lose money, and buy low and sell high remains a sound guiding principle (of course, getting the timing right takes some effort). This is especially true in tax advantaged accounts with low trading costs, where positions can be kept on a shorter leash.

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