The Only Guide to Alternative Investments You'll Ever Need: The Good, the Flawed, the Bad, and the Ugly

Chapter 3. Commodities

Commodities, which fall within the broad category of hard assets, are an interesting class from a portfolio perspective. Since 1970, they have provided relatively high returns, exhibited negative correlations with equities and bonds, and acted as a hedge against event risk. As stated earlier, the attribute of negative correlation makes an asset class an excellent diversifier of risk. Thus, commodities appear to be worthy of consideration for inclusion in a globally diversified portfolio.

We base the analysis in this chapter on evidence accumulated since 1970 on the S&P GSCI—perhaps the most commonly cited commodities index. (The other major commodity index, the Dow Jones-AIG Commodity Index [DJ-AIGCI], has price history beginning in 1991 and went live in 1999. We will discuss that index later in the chapter.) The S&P GSCI represents a broad cross section of principal raw and semifinished goods used by producers and consumers; it contains commodities from all sectors: energy, industrial, precious metals, livestock, and agricultural products. The S&P GSCI is world-production weighted, and the quantity of each commodity in the index is determined by the average quantity produced in the past five years. As of February 2008, the weightings for the S&P GSCI were as follows:

• Energy: 71.4 percent, of which natural gas was about 7 percent and the balance was oil-related commodities

• Industrial metals: 8.1 percent, of which aluminum and copper were about 3 percent and the ...