Commodities have roared up the charts as investors have attempted to position their portfolios for quantitative easing. Although the Fed's decision to buy another $600 billion worth of government bonds is beneficial to most commodity prices, some have moved to almost scary heights. Investors who want to remain in the space should remain cautious and know when it is time to take some money off the table.
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Recently, oil hit a 6-month high and has risen 17% since the end of August. This momentum has carried the United States Oil Fund (NYSE:USO), an ETF that tracks the price movements of crude oil, up 6.5% over the course of the past five days alone. Is this enthusiasm too much, too soon?
USO does have some ground to make up as it is down 4.6% year-to-date, but there are some fundamental indicators that may be preventing a further breakout. A Department of Energy report that was released on Wednesday showed that crude inventories rose by 2 million barrels. OPEC has also said that demand for its oil may be lackluster over the course of the next four years. It's hard to imagine crude breaking above $100 per barrel with these headwinds present.
The SPDR Gold Trust ETF (NYSE:GLD) has had a remarkable year thus far. The fund which tracks the price of gold has benefited at times from a flight to safety, but more recently from investors growing more and more concerned about the prospects of future inflation. GLD is up 26.8% this year.
Silver has been doing even better. The price of silver hit a 30-year high in recent days and the iShares Silver Trust (NYSE:SLV) is up 57.0% so far in 2010. What concerns me about GLD and SLV is that both have become crowded trades. Much of the inflation concerns have already been factored in to their prices. At this point, I think there would need to be a monumental crisis of some kind for these two funds to continue at the pace they have been going.
Cashing in on Crops
One ETF in the commodity space that has been exhibiting a strong performance that I see as being more sustainable is the Market Vectors Agribusiness ETF (NYSE:MOO). This ETF has more than 40 holdings focused around the agriculture industry and it is up 19.0% on the year.
This movement has solid fundamentals behind it. The Department of Agriculture is calling for a reduced output of corn on the heels of negative growing conditions in the Midwest. Corn and soybean futures are now at their highest point in two years. These commodities are bound to benefit from quantitative easing like most other commodities, but they have the added benefit of a favorable supply versus demand situation.
The Bottom Line
Commodities have flourished across the board. The test now for investors who wish to allocate a portion of their portfolios to the space is in selecting the proper mix. At the present, I feel more confident about the sustainability of the agriculture movement than the advances of other classes of commodities. A rising tide lifts all boats, but in the absence of inflation, ag stocks still stand to gain from the challenge of feeding a growing global population. Oil and precious metals on the other hand, may find their fate become increasingly reliant upon decisions made by the Fed in the near term. (For more stock analysis, see A Close Look At Mosaic.)
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