Commodity Trading & Trend Following

Last year we saw the meltdown of virtually all asset classes and the end of easy returns. Last years double digit returns from Trend Followers have interested many investors and brokers to the commodity markets. Inflation fears are on the minds of many smart investors since the central banks all over the world have printed more money than ever. One can no longer expect to gain 10% a year on your real estate, buy and hold no longer works in the stock market and 5% on long dated Treasuries are not happening.
Could trend following be the only safe haven left?

One must be aware of the appropriate warnings that THE RISK OF LOSS IN TRADING COMMODITIES CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN COMMODITY TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. Yes they are true…and one needs to heed them and be aware of them.

If you are aware and you are willing to commit some of your capital to risk; a 10%-30% allocation of your portfolio to managed futures traders/ trend followers can have a increased effect to your wealth over a long time. Trend following is non-correlated to equities, bonds and even real estate, futures out perform while other markets go through draw downs. We saw that last year. When one looks at over 70-80 markets invariably one or more than one can trend in any year. It does not matter the direction. What matters is the trend and trend followers can potentially take advantage of this. The true key is to manage the risk. Truly good trend followers do not risk more than 1% on any given trade… look to have a maximum exposure to any sector…and look to have a maximum open trade risk at any time.
Obviously past performance is not indicative of future results, commodities have tended to outperform other asset classes in times of inflation. Printing of money has historically brought about inflation. So why should this time be different? All one has to do is look at Germany before WW2 or even Zimbabwe ( Gd Forbid). Bernanke has learned from the Depression ( so he thinks)… On the TV show Sixty Minutes, Bernanke stated that he intends to avoid the mistake the Fed made in the 1930s of contracting the money supply.. They have increased the money supply to the extreme of the opposite direction.
Even if there a Black Swan event of no inflation, there has been a drop in worldwide production of many commodity classes in 2009. The credit crisis has reduced the availability of farmers to acquire seeds, fertilizers and pesticides that they will need for this years crops all due to the lack of liquidity. The same is true in the field of mining due to lack of available capital. Basically it all boils down to supply and demand. Even if there is no inflation, there will be less supply which will cause prices to increase. Simply a growing population and a finite supply of commodities can be the catalyst for higher prices. Examples are becoming present. All one needs to do is look at the price of Crude oil or even the grains. They are starting to move.

Where will you put your money to protect it?

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