But How Do You Hedge Against Commodities?

Posted on Tuesday, June 10th, 2008 | In Commodities, Energy Markets

Contributed by: The Energy Report (http://theenergyreport.com) -

Source: Mineweb.com 06/09/2008
Since the onset of the so-called supercycle, around early 2002, commodities have increasingly gained the reputation of being a hedge against everything - except, now, so it seems, commodities.

In the past few days, crude oil prices have surged into unchartered territory, close to $140 per barrel, closer to an as-yet unknown “choke point”, where oil will demonstrably unleash serious damage on the global economy. Today’s oil prices are the highest - in inflation-adjusted terms - seen since the 1860s, an event that triggered the Pennsylvania oil boom. In the modern era, oil crises were seen in the mid-1970s, when prices topped $45 a barrel in today’s money, and then $90 a barrel in the early 1980s.

In their most modern manifestation, commodities have also increasingly emerged as a separate asset class, and, when seen as a “hedge against everything”, offer indirect exposure to emerging markets industrialization, plus as a hedge against inflation. Commodities have also long shown low correlations with risky assets such as equities, and, in recent years, have encouraged diversification-related demand from pension funds and other traditionally conservative investors…

But can commodities survive each other? And if so, where will oil prices top out, given that oil comprises the biggest weighting of any comprehensive basket of commodities? A number of recent studies have pointed out that a good number of factors offset today’s record high oil prices, compared to the crises seen in the 1970s and 1980s - both of which pushed the global economy into recession…

In the final analysis, the best hedge against commodities is the action - or lack of it - taken by consumers. On the way up, consumers with the willingness and ability to have partaken in investment markets would have been hedging by riding the rising wave of crude oil-related investments: traditional equities, along with proliferating numbers of exchange traded funds and notes, futures, and indices…