Market investors have reveled in low interest rates for years now, but it seems the good times for bonds and stocks are about to come to an end. The announcement from the Federal Reserve to raise interest rates several times in 2016 will undoubtedly spark a negative reaction for treasury bonds. So where can investors turn when the value of bonds begin to drop and capital prices start going up?
One obvious option would be commodities, or commodity exchange-traded funds. Higher interest rates generally reduce market price of physical commodities since producers tend to want to extract and sell their supply sooner rather than later. Companies are not keen on letting their inventories gather dust while customers are in a purchasing mood. Look at oil and precious metals to get a good idea how commodity markets respond to rate hikes. While it’s true that speculators also tend to shift out of commodity contracts, the increased appreciation of domestic equity will naturally lower the price of traded commodities with a global demand.
The general consensus is that a raise in interest rates will lower commodity prices, but at what rate? Will we witness another surge of commodity sales on the markets, akin to what we saw thirty years ago?
Maybe, maybe not.
It’s a sixty-four dollar question, because quite a lot has changed since the 1980’s. With the economies in India and China closing in on the United States, and with a host of other markets seeing a rise in their respective middle classes, economic conditions in the U.S. is as much dependent on international developments as domestic. You also have to factor in the artificially inflated environment that years of low interest rates have created, along with a growing national debt that shows no signs of slowing down any time soon. Many currently consider the U.S. economy as weak and vulnerable, making it uncertain whether higher rates will truly strengthen the dollar. The Fed’s decision to boost interest rates was a necessary move, but it might not be enough to put the economy back on track. If the dollar remains weakened, even after a series of adjustments, commodities such as gold and precious metals would undoubtedly emerge victorious.
A prudent move would be to invest in commodities as soon as the market reactions to the rate corrections start to show, together with a portfolio diversification in commodity ETF’s. This would provide you with a healthy supply of physical assets along with company equity in related market sectors. For instance, if the economy tanks as a consequence of insufficient financial policy reform, your rare commodities will see an exponential increase in global demand and price. However, if the Fed’s move is a complete success and commodity prices go down, your investment in ETF’s are less likely to see a volatile shift in capital appreciation, as they are less sensitive to short-term price fluctuations.
Whether you’re an convinced optimist or intrinsic pessimist in terms of future economic developments, rare commodities represent a relatively safe haven for your money. Combined with similar investments to give you the same benefits and flexibility as other financial areas, you can diversify your funds according to personal preference.…