What's Good About the Metals' Bad News

|
Includes: DBA, DBS, GLD, IAU, SLV
by: Hard Assets Investor

By Brad Zigler

"Someday the commodities tower will topple, leaving imprudent investors who've overspent on commodities vulnerable to volatility at best, and deep losses at worst. No one knows for sure when the tide may turn against commodities, only that it will. Tread cautiously."

Pretty ominous warning, right?

Those words issued from this very column a year ago ("The Good, The Not-So-Bad And The Ugly") as we assessed the then-best- and worst-performing exchange-traded commodity funds. A year ago, commodity funds were, virtually, gold. And silver. And agriculturals.

Just a month after the column's appearance, the floor yawned under gold, setting the yellow metal on a nearly $400-an-ounce tumble that eventually dragged the rest of the commodity complex down with it.

Most of last year's top ETFs - those tracking gold and silver - have since recovered to again lead the sector.

2008's Top-Performing Commodity ETFs (As of February)

Fund Name

Ticker

Holdings

Gain vs.

200d MA

(2008)

Gain vs.

200d MA

(2009)

PowerShares DB Agriculture

DBA

Futures

+29.67%

-15.14%

iShares Silver Trust

SLV

Physicals

+24.67%

+20.80%

PowerShares DB Silver

DBS

Futures

+20.12%

+20.85%

iShares COMEX Gold Trust

IAU

Physicals

+19.72%

+16.73%

streetTRACKS/SPDR Gold Shares

GLD

Physicals

+19.68%

+19.80%

Average

+22.77%

+12.61%

Click to enlarge

Clearly, precious metals ETFs have fared comparatively well over the past year. They've pretty much earned the same marks as last year. Ags, on the other hand, have only recently found their legs after falling off the hay wagon.

So, was last year's dire admonition proved wrong? Well, no; not really. Yes, metals have recovered. Other commodities haven't. Oil's a good example. And, of course, ags.

Remember, though, last year's caution cited the risk of excessive investment in the commodities sector.

So, what's an appropriate level of exposure to commodities?

That depends upon a number of very personal characteristics such as your economic outlook, the amount of capital you have available and your tolerance of risk, among other things. If you have no idea how much you should commit to commodities, or other asset classes for that matter, don't worry.

You can experiment with asset allocations using a nifty online calculator that allows you to vary your investment profile along seven key parameters. Using a slider bar, for example, to steadily increase your age input, you can see how your portfolio's allocation to commodities may change as you approach retirement age. Fiddle with the slider bars for the other parameters (risk tolerance, economic outlook, the level of current income required from the portfolio, the portfolio's capital base, your savings rate and your tax bracket) and you'll soon see how the factors interplay to jigger your potential hard assets exposure.

Forearmed, you should be able to find a comfortable exposure level. Forewarned, it shouldn't be excessive.