NEW YORK - With oil prices touching record highs in February, it’s natural that some investors would want to jump into energy investments and others would recoil out of fear of a bubble.
Peter Kurata, an investor in Cypress, Calif., doesn’t care which theory wins out; he relies on technical indicators to move in and out of investments and for now oil has an appealing sheen.
"It’s very much in favor. I can’t estimate how long it’s going to run for but at least in the short-term it looks pretty good," he said. "I just follow where the leadership is and right now the commodity-related stocks are showing the leadership."
For investors looking to diversify their portfolios amid a pullback in stocks this year and who don’t want to miss out on the ride in commodities, the answer might be to ease into some corners of the commodity market while keeping in mind that not everyone has to the stomach to be an oil prospector. The commodity markets are known for their volatility.
Kurata in mid-February invested in the PowerShares DB Commodity Index Tracking Fund, a Deutsche Bank index fund that lets investors draw returns from the commodity and currency markets. He’s seen more than a 6 percent return.
He said he’s not concerned that such sharp gains signal a bubble is building. Individual commodities investments make up 20 percent of his portfolio — a larger percentage than many investment advisers might recommend — and his style of investing is also more aggressive than that of many people. But his enthusiasm right now for commodities such as gold, wheat and oil is shared by others.
"I’m pretty fluid with my investments. I can get in and get out once I see it’s not working," Kurata said.
But even for investors who might shy from such a sizable commitment to commodities and the rigors of having to make fast-paced investment decisions as Kurata does, commodities can maintain a reasonable portion of one’s portfolio. But investors who might be fearful that some prices have gone too far, too fast should be cautious.
Thomas Winmill, president of Midas Funds, said investors should consider an investment in a commodity like gold because of low interest rates and increases in inflation. He said investors should try to envision where demand might be in the coming months, not where it stands now.
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"It’s the old Wayne Gretzky move to try to figure out where the puck is going to go. I think in six months from now people are going to be talking about inflation and saying ’Gee, inflation is taking a whack out of my ability to buy stuff,’" Winmill said.
But investors should be ready for gyrations and, in most cases, have a long-term perspective. Winmill noted that while oil prices jumped 60 percent last year amid surging demand, zinc prices lost 40 percent. Because many commodities are priced in dollars, a flagging greenback can also drive prices higher because it requires a greater number of weak dollars to buy a single barrel of oil, for example.
"Take a diversified approach or a basket approach," he said, referring to investments that hold positions in several areas at once. "It’s a volatile sector."
Winmill suggests most investors have about 5 percent of their holdings in commodities investments.
While some observers say demand for commodities will likely rise thanks in part to growth in countries like China and India, others are worried that a global economic slowdown could dampen demand.
Frank Holmes, chief executive and chief investment officer for U.S. Global Investors Inc., said the enormous growth in the world’s developing countries and what he described as a paltry investment in the infrastructure needed to obtain more resources makes it likely that many commodities will show long-term gains in prices.
To illustrate what he sees as seismic shifts taking place in the demand, he noted that in China and India, each person consumes an average of two barrels of oil per year compared with an average of 25 barrels per person a year in the United States.
"And they’re growing at 10 percent," Holmes said, referring to places like China.
Holmes notes that decisions by managers of big pensions and similar investments support a notion that long-term bets on commodities are not unwise even if prices soon recede.
The California Public Employees’ Retirement System has said in recent months, for example, that it would step up its investments into areas including commodities.
"You’re seeing each year pension fund groups are putting money into commodities but the average investor is not," Holmes said.
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