Most of the portfolios that I have seen do not have commodities in their portfolio. I am talking of about 50-60 people in the region of US $ 5 million and above. If they have gold it is for consumption (Jewellery, mostly for the women of the house). I have been a non believer of commodities – even gold – as a part of portfolio diversification. I would rather invest in Developed countries Blue chip (mostly dollar denominated) rather than invest in commodities.

Most of the people suggesting commodities in the portfolio tell you that there is “no correlation” to stocks and hence you should have commodities in your portfolio. Amusing, to say the least. As more and more ‘financial’ portfolios seek commodities to ‘diversify’ the more that the commodities become ‘financial’ and correlated. Exactly negating what you sought to achieve.

Even assuming for a minute what commodity will you choose? Oil? Gold? Copper? – all of them today have more contracts than the world production or world consumption put together!!

So the Financial Planner tells you that you should have some commodities in your portfolio, and you are impressed. So you buy commodities (does not matter what). So you buy a godown and store it, right? No. You buy contracts which YOU THINK tracks that particular commodity. Then you roll it over every 3 months. So you end up paying high costs, a high contango charge, a risk when you roll over the contracts, and worse end up with some losses. Or take the case that it behaves just like cash when it comes to your portfolio. How has it helped your portfolio? It has not. So now your IFA tells you ‘maybe we choose oil and it did badly, let us choose Mercury. Since you do not care/ know you nod your head. Bad luck. Repeat.

I can assure you that I have no clue what drove oil to $ 28 a barrel. When it was 120 and Goldman Sachs predicted a price of 200, I never thought that they got an extra zero!! Just bad guessing. If you had told me today’s price is 120, US will print notes, but Saudi Arabia will be a financial and political mess, Iran and Iraq will be rebuilding, and some of them have long term contracts, I would have believed 200 and not 20. Well 20 does not seem far away, and in one years time it could be nudging 50. As I said, no clue.

You want a good benchmark? Well, do not bother see whether your portfolio can meet your goal. If it cannot, downsize goals or increase EARNED income. Portfolios can give about 3% real return. Churning does not help.

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  1. Dont these commodities especially physical gold end up acting as hedges to financial instruments as everyone moves towards them when financial assets go down?

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