One graph that caught my eye this week was how commodities are now highly correlated with equities. You can find that graph here.
The graph in that link indicates that correlation levels have tended to move in cycles since 1970. While there have been times where commodities have been negatively correlated (stocks move up, commodities move down or vice versa) and non-correlated (stocks move up and commodities may move up or down or vice versa), right now commodities and equities have never had a higher correlation.
This is likely not news to some of you. Without any sort of data it just seems to me whenever I hear oil moving one way that stocks seem to move that same way. This creates a problem for those investors who purchased commodities as a way to hedge against equities. Thus, if commodities are used in that manner, it’s probably time to get a new hedge.
That said there are still reasons to have a commodity allocation in your portfolio. They can be used for the following:
- Inflation hedge
- Dollar hedge
- Capitalize on long-term demographic/economic/geological trends
