Timing is Everything

We read yet another article on the end of the commodity “supercycle”  and the implications for ETF’s and other vehicles ostensibly designed to give investors exposure to commodities.  The arguments made for investment in commodities historically has centered around their positive correlation with inflation, and their negative correlation with other more traditional asset classes like stocks and bonds.  However, as with all asset classes, the strong upward move in price over the last 8-10 years has given birth to laundry list of investable vehicles like ETF’s, ETP’s, total return indexes,etc..  The objective of all of these financial instruments was to give the investor (institutional or otherwise) the targeted commodity exposure they so desired.  These vehicles more importantly also gave investors instant liquidity, and as such, provided them with the ability to shift their exposure should conditions warrant: read price decline.  In some regards therefore, we could term the exposure to commodities”exposure- lite”.  In this vein, investors feel they need some allocation to commodities, but practically speaking their level of commitment ends at the breaking of an uptrend in price. This completely myopic view of the world virtually ensures that they will not have the appropriate exposure when conditions change.

The change in conditions we refer to is the coming shift away from financial assets and towards hard assets.  While there may be a premium associated with liquidity in todays world, this premium will continue to pressure most commodity investors into liquidity driven exposure such as ETF’s rather than pursuing longer term vehicles designed to give them the longer-term exposure that is needed. It has been said that timing is everything, but a short-term fixation on timing commodity markets will leave most investors woefully under-invested amidst the coming secular shift.