A Broad Spectrum of Commodities
The GSCI contains as many commodities as possible, with the rules excluding commodities only to retain liquidity and investability in the underlying futures markets. Currently, the GSCI contains 24 commodities from all commodity sectors:
Goldman Sachs Commodity Index
The GSCI is designed to provide investors with a reliable and publicly available benchmark for investment performance in the commodity markets comparable to the S&P 500 or FT equity indices. As such, the GSCI is a composite index of commodity sector returns, representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities. The returns are calculated on a fully-collateralized basis with full reinvestment. The combination of these attributes provides investors with a representative and realistic picture of realizable returns attainable in the commodities markets.
Individual components qualify for inclusion in the GSCI on the basis of liquidity and are weighted by their respective world production quantities. The principles behind the construction of the index are public and designed to allow easy and cost-efficient investment implementation. Possible means of implementation include the purchase of GSCI-related instruments, such as the GSCI futures contract traded on the Chicago Mercantile Exchange (CME) or over-the-counter derivatives, or the direct purchase of the underlying futures contracts.
The ten-year picture
What the above chart indicates is that commodity prices moved up from 1994 to the end of 1996, from the start of 1999 to the end of 2001 and from October 2001 to the present day. The question is, therefore: "Can the present bull market, which has lasted longer than the two previous ones, continue or are we close to one of these severe corrections which have followed each time?
Nevertheless, a secular rise in commodity prices during the next decade is a significant likelihood.
Commodities are bargains!… and as good as gold ( see above chart!)
If "buy low, sell high" makes any sense at all, this is the time to buy. As the chart below suggests, the secular decline in commodity prices has come to an end and a reversal is in progress. As commodity prices move back up to "normal" levels, they will attract additional investors into what is a relatively small arena. Even a tiny asset allocation shift from stocks/bonds into commodities could give a pronounced boost to commodity prices.
One key factor worth noting is the falling US dollar. If the US dollar continues to weaken, prices will rise to compensate. A trend of rising prices tends to attract more investors and they could push prices higher still. Eventually this process could develop into a classic spiral of rising prices such as occurred during the 1970s.
Nevertheless, while the US-Dollar has fallen by close to 25% against a basket of other currencies since 2002, commodity prices as per the GSCI have risen close to 100%.
But for most, the rationale behind rising commodity prices is simple:
World Population: 1950-2050
The long-term picture
Judging the long-term trend, we can safely conclude that it is well established, but that there have been buying AND selling opportunities on the road.
Taking a pragmatic stance, we know that the up-trend is intact but we do not know when it will end. Using the past as guidance, we suggest holding on to existing positions, while those who wish to buy could set a buy target of 325 points, while carefully observing if the RSI is showing signs of a trend-reversal.
A reading of 48 points in the RSI is still above the lows established during this bull-market. It may or may not fall back to the 40-point level, but it may prove worthwhile to wait for clear signs that prices are turning up.
The medium- to short-term picture
The medium-term picture shows a down-trend while the long-term chart reveals an up-trend. As we pointed out before, the 325 point level seems to be a reasonable buy target, as at that point, we would undoubtedly approach a substantially oversold condition from which level we can expect a bounce within the short-term down-trend or, indeed, a resumption of the up-trend. Investing in the GSCI
The GSCI is a publicly available index and freely licensed to all market participants.
The GSCI has a futures contract listed on the CME making it a truly public and non-proprietary index that has been traded by numerous market makers for over 12 years.
An investment in the GSCI provides accesses the liquidity of the underlying commodity markets and offers excellent price transparency.
Goldman Sachs Commodity Index Futures Specifications
Name and Symbol: Goldman Sachs Commodity Index (GSCI), Chicago Merc, GI
Contract Size: $250 x Goldman Sachs Index (roughly USD 85,000)
Minimum Tick Size and Value: 0.05, worth $12.50 per contract.
Trading Hours (Chicago time): Open-outcry trading is conducted from 8:45 AM until 2:15 PM. Globex offers electronic trading of the GSCI from 2:30 PM until 2:00 PM the following day, Sunday through Thursday.
Available Trading Months: Primary trading months for GSCI futures are January, February, March, April, May, June, July, August, September, October, November, and December.
RISK
Guessing the future is ALWAYS risky! However, with a bit of discipline, you may turn the odds in your favor. But for most, the real obstacle to success is their emotions over greed and fear which make them act irrationally.
If you buy one contract of a GSCI-future worth USD 85,000 and you panic when it goes down 10% or 20%, you should not even start investing.
Conclusion
While in the short-term the consolidation may continue for a while, we remain confident that we are in a secular bull-market which may last several years. Our recommendations were valid at the time of writing, viz. at
and not necessarily hold at the time of reading.
Peter Zihlmann
www.pzim.com
investment@pzim.com
forex@pzim.com
May 25, 2005
Disclosure: The author has not been paid to write this article, nor has he received any other inducement to do so. The author is a shareholder in the company and will benefit from any increase in the company's share price. Disclaimer: The author's objective in writing this article is to invoke an interest on the part of potential investors in this stock to the point where they are encouraged to conduct their own further diligent research. Neither the information, nor the opinions expressed should be construed as a solicitation to buy or sell this stock. Investors are recommended to obtain the advice of a qualified investment advisor before entering into any transactions in the stock.