Be Careful With Commodities

PIMCO is one of the most trusted names in investing. Let's face it, the majority of the public (hell, most people working on Wall Street) lacks the sophistication to invest on their own. Funds of all shapes and sizes, as well as, bonds make up the brunt of the average investor's market related investments. Robert Greer is the co-manager of the Pimco Commodity Real Return Strategy Fund. In the following interview he discusses why commodities will continue to grow in value and why they are becoming as much a risk management tool as they are already an investment vehicle.

I bring this issue up at a time when many investors are quietly skeptical of commodity bubbles blowing all over the globe. As the world globalizes and the financial crisis continues to fumble along, saying that commodities will continue to grow in value has become near religious dogma. We have to remember, however, that for generations of investors commodities were always a speculative play over the long term. Being young and not having had money in the markets for thirty or forty years makes it easy for many a monkey to dismiss Greer's logic as common sense or obvious. Beware that logic. There are risks involved in commodity markets that make the toxic Z tranches of yesteryear seem paltry in comparison.

The subjects of Operation Twist and the ever-on-the-tip-of-the-tongue QE 3 are broached, if not given a full on treatise. I do have to wonder, however, how many small/individual investors will be comfortable with moving larger percentages of their portfolios into commodities. The more of a shift there is towards commodities, the more I see the little guy liquidity providers getting squeezed out even further.
If I am right, what does this mean for markets? Can we really have a liquid and functional market if only big money interests are involved? Can commodity growth in both size and scope impact markets positively from a functional standpoint?

As investing in commodities continues to rise in popularity there is a real danger of non-market related events becoming more of a worry for investors of all shapes and sizes. The odd political intrigue here, a calamitous revolution there have always effected commodity prices. This is a large part of why commodities have never been looked at as a safe investment. When you live in a world of low returns, however, sometimes you can forget the lurking dangers of volatility. As much as people believe in gold, silver, oil, wheat, corn and other staples of our civilization, none of them have been a safe bet forever.

I have to wonder at this point how close we are to a bursting commodity bubble. It doesn't seem to be on the horizon, but then again...that's usually when the unexpected tends to occur.