Bookstaber: Commodities Are Not An Asset Class

Richard Bookstaber has an interesting commentary up about asset classes and diversification.

Cutting to the chase he does not feel that commodities are an asset class because “they are factors of production. They do not generate returns, they have no claim on production…” As I read his thought process it feels like a discussion of what the meaning of “is” is.

The other side of the argument would be that commodities have a price, the price is influenced at times by supply and demand (perception of economic need), at other times influenced most heavily be emotion (fear and greed) and at other times weather or other external shocks (some overlap with emotion). Like other things the correlation to equities ebbs and flows but most of the time the correlation to equities is low. The action in 2008 clearly showed us that the correlation is not always low and it may not be that low this year but if you are investing (as opposed to trading) for time horizons longer than a year or two and are willing to make the occasional tactical decision then whether commodities are an asset class or not begins to drift into the realm of irrelevance.

In the last few years gold is up a lot while US equities are down a lot. Anyone who has owned a little gold during that time has derived some benefit regardless of asset class or not. Maybe gold is less compelling now that it was five years ago (although many people believe it is) and anyone thinking that to be true would tactically reduce or eliminate the position.

For what it is worth I do believe commodities are an asset class. Yes the metrics and dynamics are usually different than that of equities but there are metrics and there are dynamics as there are with equities and fixed income and for that matter currency. Anyone believing they can add value (however they define it) to their portfolio should own commodities and anyone thinking commodities do not add value (however they define it) should not.