Commodities: Making the Most of Volatility

Supply/demand imbalance a boon for investors.

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story_images_oil_gas_miningA new paper by Credit Suisse suggests that sustained volatility in commodity markets represents a long-term boon for investors as supply/demand conditions tighten and short-term supply shocks provide new opportunities to generate alpha.  The authors take a close look at the drivers of commodity volatility both today and in the past – and they make a case for what they see as a prolonged period of supply/demand imbalance.

A couple of interesting points. The paper makes the case for peak oil, which the authors suggest occurred in the mid-2000s. And they point out the huge role weather plays in tightening up supply/demand conditions and fueling volatility for certain commodities like sugar.

So how can investors use these changing market conditions to their advantage? The authors suggest that diversification among different commodities and active management are key to managing volatility. They also remind that investors that commodities’ correlations to traditional assets remains “intact” and that their diversification benefits are still solid.

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