After a dismal 2011 which saw commodity ETF assets drop in price close to 20%, commodity positions are bouncing back.
While gold continues to struggle as risk assets move in to favor, diversified comodity positions have rallied strongly in 2012. In particular, energy assets have enjoyed strong gains as the price of oil climbs toward record highs. Companies like Exxon and Chevron will no doubt benefit from rising energy prices and pay dividends as well that are highly sought after by investors. But one should not underestimate the benefits of investing in commodity assets rather than companies that benefit from higher commodity prices. There is a place in a portfolio strategy for direct commodity investing.
With oil prices skyrocketing, energy ETF's are in high demand.
But it is important to recognize that the price of oil is in all likelihood rising due to fears about Middle East tensions. In our view, the demand simply is not there as a muted global recovery meanders forward. Be cautious in investing in energy and recognize that downdrafts can rapidly occur when sentiment changes. Despite these concerns, we do believe the long-term trajectory for oil prices is higher and for that reason energy assets deserve a place in one's portfolio strategy.
Agriculture commodity assets, which include corn, wheat, rice, and livestock, are positioned for strong increases as global consumption of food products rise. In emerging markets, middle-class increases continue and this will no doubt lead to higher food prices. We are already seeing countries in Asia importing rice for the first time in history and we see no reason strong consumption will not continue. In Singapore, for example, fast food restaurants like McDonald's have been forced to raise prices in response to higher input costs.
Industrial metals will likely also rally given a restart in emerging market growth, though the picture is certainly cloudy at present. With China's economy stumbling forward and GDP strength uncertain, increases in commodity prices for industrial metals is likely to be accompanied by choppy price movement. Still, this does not mean the commodity investments in base metals should be avoided. In our view, investing in copper, aluminum, tin, and other industrial metals make sense.
Lastly, precious metalsmake sense as emerging economies continue to distrust the United States and European currencies. Coupled with massive demand for ornamental uses of precious metals from countries like India and China, it is our view that the bull market in precious metals is not over despite a difficult start in 2012. At the very least, precious metals can provide a hedge strategy for equity positions and global uncertainty.
Investing in commodities make sense in an environment where distrust is so high in sovereign debt, inflation appears to be percolating in the United States, and emerging market growth is restarting. Hedging a portfolio strategy by utilizing commodities is a way to participate in global economic growth without investing solely in equities. It's a diversification strategy that makes sense for the long-term particularly given current conditions.
Mr. Yoshikami will be on CNBC's Power Lunch today at 1pm/et to discuss this topic in futher detail.
Michael Yoshikami, Ph.D., CFP®, is CEO, Founder and Chairman of the DWM Investment Committee at Destination Wealth Management. Michael is a CNBC Contributor and appears regularly on the network. DWM is a San Francisco Bay Area-based independent money management firm that provides fee-based wealth management services to institutions and individuals around the world. Michael was named by Barron's as one of the Top 100 Independent Financial Advisors for 2009, 2010 and 2011.