Innovation as a Risk to Commodities Investing

October 14, 2011

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The WSJ published an article on the risk technological advancements pose to long term commodity investments, highlighting several historical examples that shut down entire markets.

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Dylan Grice famously said “when you buy commodities, you are selling human ingenuity.” He pointed out that after adjusting for inflation, spot commodity prices are flat since 1871. Author William Bernstein trotted out the familiar “you’re picking up nickels in front of a steamroller,” with permanent commodities investments. “The risk of getting crushed [by a new innovation] is enormous.” Grice recommends those that are developing innovative extraction techniques in lieu of pure commodity plays.

Source : WSJ
 
HS : In addition to Grice’s recommendation on efficient producers, those with superior information, such as Glencore, are also appealing. Commodities that are trading below their marginal cost of production and have low inventories have been shown to make for good investments.

“There is no bull side or bear side, only the right side.”

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