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Will Diversified Commodities ETFs Continue Their Bull Run in 2012?

Some analysts are predicting that the equities market could retract by as much as 16 percent in 2012. Considering the rocky year many stocks have had during 2011, this is alarming for investors,

Some analysts are predicting that the equities market could retract by as much as 16 percent in 2012. Considering the rocky year many stocks have had during 2011, this is alarming for investors, many of whom have begun to move their holdings from stocks into commodities. As the dollar is increasingly unsure and the threat of a European recession looms, investors dissatisfied with the ongoing volatility are turning to diversified commodities funds according to Smart Money.

Investors have put around $7.6 billion into diversified commodities funds as of the close of October, according to fund research firm Lipper Inc.,  and many analysts expect that trend to continue into 2012.  During that period, investors yanked $9.2 billion out of stock mutual funds. The tenuous economic circumstances of late are among the key influences on this trend but so are the results of many financial analysts who made the switch early. The same Smart Money piece discusses the decision by financial adviser Adrian Day to move roughly 10 percent of his $160 million into precious metals from silver and platinum to gold and palladium. While much of the equity market retracted, Day boasts a return twice the previous years’ levels.

Other investors who elected to snap up PowerShares DB Precious Metals Fund (DBP) early in the year have watched the price increase by over 22 percent over the course of the last year. Not all investors looking to escape the equity market chose precious metals though, some elected to invest in oil on the basis of increased demand from emerging markets. Investors who pursues this route, specifically those who selected the PowerShares DB Oil Fund (DBO) have watched their investment accrue a 7 percent gain year-over-year.

There are a number of reasons why this sort of investment appeals right now, it offers built-in diversification, protection against inflation and exposure to emerging markets without offering too much of any one of those things. Protection against inflation could be predicted to be even more of an intense draw in the coming year as the recent news surrounding Europe could lead to higher inflation and a boost to commodities of all kinds. Money managers are beginning to look at commodities investments of this kind as an awning of sorts to wait beneath until the rain clears or they can more accurately assess the market’s direction. A recent survey performed by the insurance company Jefferson National, and included in the Smart Money article, indicated that close to 70 percent of financial advisers said they had increased their use of alternatives since 2008 and intend to continue increasing exposure to this area of the market in the future. Famed investor Jim Rogers agrees that this part of the market could have more room to expand. He cites such factors an increase in global infrastructure expenditures as reasons why this corner of the market could continue to rise.

According to the Organization for Economic Cooperation and Development [OECD], global investments in such power generation, transportation and other infrastructure undertakings could reach a towering $40 trillion by 2030. Additional pressures on commodities from the populations of emerging nations, including China, India, South American and Eastern Europe are also in support of commodities growth. Some managers have sold off early commodities investments after making significant returns based on China’s most recent economic information, but demographic realities are still in place that could prompt greater growth.

Whatever their reasoning, the public bullishness of many money managers towards diversified commodities ETFs seems as though it could continue to help them grow in the coming year. A large majority of the factors that helped produce impressive returns in 2011, from the unsure direction of the dollar to slow domestic growth, can be predicted to continue to weigh on equities (arguably even more so) and thus benefit commodities into 2012.

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