Bargain Buys in Commodities

03/04/2014 9:00 am EST

Focus: ETFs

Richard Stavros

Analyst, Global Income Edge, Utility Forecaster and Personal Finance

We believe the recent sell-off represents a once-in-a-lifetime opportunity to purchase inflation protection at ultra low, bargain prices, suggests Richard Stavros, editor of Inflation Survival Letter.

This is mainly because the market has significantly overreacted, with uncanny similarity to last May, when a sell-off was triggered after Fed Chairman Ben Bernanke made his initial comments about plans to taper the stimulus program.

GreenHaven Continuous Commodity Index (GCC) is an exchange-traded fund that aims to track the Equal Weight Continuous Commodity Total Return Index (CCI-TR), which provides exposure to diversified commodities. The index is up 4.75% year-to-date, and up 24.63% over the last five years.

The CCI-TR is an equal weighted index of 17 commodities plus an additional Treasury bill yield. CCI-TR is one of the only commodity indexes to provide meaningful exposure to all four major commodity subgroups: Energy, Metals, Agriculture, and Softs.

Similarly, GreenHaven is exposed to 17 commodities including: corn, wheat, soybeans, soy oil, live cattle, lean hogs, coffee, cocoa, sugar, cotton, platinum, gold, silver, copper, natural gas, crude oil, and heating oil.

Due to its equal weightings, the ETF offers significant exposure to grains, livestock, and soft commodities, and a lower energy weighting than many of its peers. Currently, the ETF has 24% of its allocation in soft commodities, 24% in metals, 34% in agriculture, and 18% is in energy.

GreenHaven is rebalanced every day to maintain each commodity's weight as close to 5.88% (equal weighting of all 17 commodities) of the total as possible. However, allocations for commodities may suffer dramatic change over time. For example, the ETF recently closed out its position in orange juice for other soft commodities.

Commodities tend to serve as an inflation hedge over the long-term. As inflation rises, the value of paper/fiat currency loses value and demand for commodities (tangible goods) often increases.

Also, during an inflationary environment, the costs to produce commodities such as energy, food, softs, and metals often increases, forcing commodity prices higher to keep pace with the inflation rate.

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