This is a ressearch piece that I think discusses the problem well AND give the basis for setting up a position (done with oil);http://www.indexuniverse.com/publications/journalofindexes/j...Investing in commodities has been recognized as a valuable means for achieving broader portfolio diversification, and seeking enhanced investment performance with reduced overall portfolio risk. Commodities returns have been positively correlated with inflation and unexpected inflation and have shown little or no correlation to equity and bond market returns. In seeking these benefits, investors have increased allocations to commodities markets at a rapid pace. According to data compiled by Jefferies Asset Management, LLC, based on various industry sources, including the Commodity Futures Trading Commission published reports that track the holdings of various dealers in listed futures and OTC contracts linked to a broad array of commodities, investments in commodities grew from approximately $9 billion in notional terms in 2000 to nearly $160 billion in 2009, a growth rate that exceeds 37 percent per annum (Figure 1). During this same period, many commodity prices soared: Oil rose from $26 to $79 per barrel; gold from $288 to $1,097 per ounce; and corn from $1.89 to $3.74 per bushel. But even with such strong positive momentum, investors in certain commodities strategies have fared poorly. In fact, despite experiencing one of the greatest bull markets in commodities, commodities investors have underperformed spot indexes by as much as 5.6 percent per annum or more over the past three-, five- and 10-year periods.In this paper, we explore the various ways in which investors can add commodities to an investment portfolio, including spot commodities, commodities futures and commodities equities. We then explore how investors may get closer to their goal, which is to achieve returns that are comparable to returns available in the spot commodities prices.Hockeypop
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