david.fm

In my latest CNBC appearance during Capital Connection I maintain my negative outlook with some changes. I have turned more pessimist due to the high inflation in the UK, USA and throughout Asia.

The problems the U.S. and consequentially the World are facing cannot be solved in one quarter. Major losses not only in the Banking sector but now also in the insurance one (AIG reported huge losses and lost more than 70% of its value in 12 months) cannot spread optimism.

Commodities are still a good investment, especially through an Index that gives you the return of Treasury Bonds plus the commodities futures appreciation. Two particularly good Indexes are the Deutsche Bank Liquid Commodity Index Optimum Yield that returned 22.38% this year without any leverage. Another good index is the UBS Bloomberg CMCI that makes investing in commodities, without leverage, as easy as buying shares (both the DLBCI and UBS CMCI are available as Exchange Traded Notes that are traded exactly like shares).

These two indexes adopted a dynamic way to roll into future contracts that can considerably reduce losses/increase yields. Previous first generation indexes can potentially lose more due to the commodity market backwardation.

My theory has been confirmed with facts with the commodities rebound that occurred on the 21 August 2008. Of course it is still early to say but, with such an high inflation, commodities should do better than equities. It is also important to note that commodity indexes benefit from the fully collateral represented by treasury bonds. When you invest in commodities futures the only required margin is approximately 5% of the contract value. The remaining is kept as treasury bonds in total return index. This represent a non-leveraged investment in commodities.

The Commodity Guru Jim Rogers, of the famous Rogers International Commodity Index that returned over 14% this year and over 340% in the last 10 years agrees with my view and is bullish on Oil

Of course commodities are highly volatile. This is why an index reduces the volatility and allows you to invest for the long run. Without leverage the risk is much lower and similar to the one represented by equities.

The benefit: Mr. Sugar, Mr. Oil and Dr. Copper cannot have any issue with their board of directors nor can hide to investors some huge losses. They simply reply to supply and demand. Speculation plays an important role in the commodity market but the same is true in equities: we have all seen (and still see) companies trading at 50+ times earnings. This is by far more speculative than commodities.

Happy Investing