Talking Commodities With Commodity Expert Matthew Bradbard (GLD, SLV, AGQ, DZZ, ZSL)
Jared Cummans: Matthew Bradbard is the president and founder of MB Wealth, a full service commodity brokerage firm. MB Wealth offers access to commodity markets as well as three different trading packages depending on your investment style. Mr. Bradbard also publishes weekly articles commenting on the state of commodities and how they tie with broader equity markets. Whether you are a seasoned futures trader, or a retail investor looking to hone in on the power of commodities, MB Wealth and Bradbard present themselves as an excellent resource [see also Three Things Wall Street Journal Didn’t Tell You About Commodities].
Recently, we had the opportunity to speak with Mr. Bradbard about his take on commodities in today’s environment.
CommodityHQ (cHQ): Some investors feel that commodities have no place in individual portfolios. Do you agree or disagree?
Matthew Bradbard (MB): I completely disagree. Investors that have an understanding of two critical things, an understanding of the asset class and a higher risk tolerance, should be involved in commodities. Look at the alternatives: a faltering real estate market, Treasuries with near record low yields, and a sideways stock market. My advice is conservative investors should have a 5% allocation to commodities and aggressive investors should have a 20% allocation to commodities. As the volatility has increased, margins have been raised and markets have become more correlated. We would, however, suggest that investors leave it to the professionals and look for a Managed futures allocation as opposed to the individual trying to navigate the commodity market on their own.
cHQ: What do you see happening first $1,000/oz. gold or $2,000/oz.?
MB: Gold has been trending higher for the last decade and as they say the trend is your friend. The current price of gold is $1650/ounce, so for me to say $2,000, it is a far better bet than seeing $1,000 because that objective is only 20% away as opposed to 40% for the latter mark. After the recent swoon in prices when gold fell roughly $300 ounce in September, we’ve seen prices start to stabilize and buyers become more active. That is not to say there will not be more dramatic moves, as we do expect the volatility to remain for the weeks, months, quarters to come. The marketplace has changed and unfortunately commodity traders need to be willing to deal with larger swings. We feel to be successful trading gold and other commodities in this environment traders must employ both futures and options, trade standard contracts as well as mini contracts, and also to incorporate hedging strategies. Additionally investors new to this arena should have broker assistance. An allocation in precious metals, in my opinion, is warranted in most portfolios as we expect both gold (NYSE:GLD) and silver (NYSE:SLV) to appreciate considerably in the next 2-5 years [see also 25 Ways To Invest In Silver].
cHQ: The S&P GSCI Index is at its lowest levels in months, do you see that trend reversing anytime soon, or do you think commodities still have a ways to fall? Why?
MB: Yes I do see the trend reversing as prices have already begun to stabilize. Let me be clear, there will be a time to play commodities from both the long and short side, and I think the only certainty is that commodity investors need to expect volatility. It is important to remember that with crude oil being the largest component in this index, accounting for nearly 50%, the index’s performance will largely be guided by the price action in the fossil fuel. For nearly twelve weeks prices have been sideways in a $10 -15 trading range, and we expect this to continue. Short term crude may have gotten ahead of itself, so prices could trade lower in the short term. When it comes to the medium to longer term into 2012, we expect prices in crude to re-take the $100/barrel level.
The second biggest component in the index is agriculture, which have also has started to recover after a steep correction in August and September. Medium to longer term we too expect prices of agriculture to make their way to higher ground. That being said, continue to buy dips in select commodities and the S&P GSCI Index as there is likely several more years of bullishness in commodities [see also Crude Oil Guide: Brent Vs. WTI, What’s The Difference?].
cHQ: How do you see the new free trade deal with countries like South Korea affecting commodity trading?
MB: Overnight I do not expect the recent changes to free trade to have a significant impact in commodities. It is too early to see the effects but I will pay the closest attention to Mexico, Colombia and South Korea as any substantial shift in imports or exports could have a sizable impact.
cHQ: Markets have been extremely volatile lately, is this good or bad for commodity investing?
MB: They say volatility presents opportunities but I think that is only true to some degree. When markets become too volatile I think it is tough for even professional traders to navigate the markets. There is no doubt that over my 10 year career I have had to evolve as a trader and I believe to be successful longer term that is a necessity. By that I mean, as I hinted above, traders may need to employ both futures and options trading strategies. Traders may need to take their allocation sizes down during extremely volatile periods. We have also suggested using mini contracts and implementing hedging strategies hoping to mitigate above normal swings for our clients. When volatility is high, like it currently is, the most important principles to remember are to cut losses, take profits and try to check the emotions at the door [see also Dividend Special: Top Companies In Every Major Commodity Sector].
cHQ: Finally, what is the most important thing to remember about commodity investing?
MB: To live to trade another day clients must employ risk management. More specifically, I mean do your homework before even initiating trades. Once in a trade make sure you manage the trade. If the fundamentals that got you in the trade change, get out. If the technical indicators are conflicting, get out. Have a profit objective and also be willing to cut loses when your are wrong. The statistics vary but as many as 90-95% of investors trading commodities lose money, so to increase the likelihood that you can be the minority, employ risk management and get assistance from a qualified commodity broker. My suggestion remains Managed futures are the best option for most investors [see also Three Reasons Why Gold Is Overvalued].
RISK DISCLAIMER: MB Wealth Corp. is not responsible and does not endorse anything outside of the content of this article authored by Matthew Bradbard; President of MB Wealth. The risk of loss in trading commodity futures and options can be substantial. Before trading MB Wealth recommends that you should carefully consider your financial position to determine if commodity trading is appropriate for you. All funds committed should be purely risk capital. Past performance is no guarantee of future trading results.
Written By Jared Cummans From CommodityHQ Disclosure: No positions at time of writing.
CommodityHQ offers educational content, analysis, and commentary on global commodity markets. Whether you’re looking to speculate on a short-term jump in crude or establish a long-term allocation to natural resources, CommodityHQ has the information you need.