CAIA Level II: Advanced Core Topics in Alternative Investments, 2nd Edition

25.6 LOOKING FORWARD

From a long-term perspective, Waugh (2007) outlines a number of fundamental changes in global supply and demand. Waugh argues that we are approaching a new world order in commodity markets. The recent outperformance of energies and metals will give way to outperformance in agricultural commodities. Similarly, Black (2009) argues that the increased standard of living in Asia is driving an increase in Asians' demand for meat. Since livestock requires significant consumption of feed in the form of grains, demand for grains is driven by the increased demand for meat. Black argues that the growth in demand for biofuels puts further pressure on the price of agricultural commodities. Finally, since many commodities are traded in U.S. dollars, and since American investors are typically interested in U.S. dollar–denominated returns, the value of the U.S. dollar relative to other currencies can have a significant impact on the returns to a commodity portfolio as well as the effectiveness of commodities as return enhancers and portfolio diversifiers.

In March 2012, Bill Gross argued that we are at a turning point that will see an increasing change in focus from financial assets to real assets, such as commodities. Gross stated, “You have to move from financial assets into the world of real assets,” because emerging markets such as China are not “looking for financial assets, they're looking to lock up commodities going forward.”1

Over the past two decades, we have witnessed ...