Tuesday, January 5, 2010

US Dollar Devaluation: Preserve Wealth, But Properly Diversify With Commodity ETFs

The massive amounts of debt in the U.S and Europe will never be repaid - unless the currencies are devalued. That is precisely what these countries are trying to do to combat deflation. How is an investor supposed to preserve his or her cash? Some suggest gold, but others say gold is just a too small market and too manipulated. Besides, while gold is considered by many as a storer of wealth, it has little practical use.

There is no doubt that commodities are the best place to be, but those that people actually need. However, investors should be wary of diversification by using correlations. There is no point in investing in commodities that are highly correlated.

We compiled the correlations of all commodity ETFs and ETNs in the U.S markets. Below is the color-coded chart. Green or red indicate very high correlations, either positive or negative, Either is bad.

The ones in bold type face are the least correlated (between -0.1 and +0.1).


(please click to enlarge)

What is not correlated:


Sugar it is. However, sugar is somewhat overbought now as its RSIs are 60.27 (daily) 67.59 (weekly) 73.3 (monthly).

LD and LSC is another reasonable pair there, at -0.18. The following chart gives you more choices as we increase the threshold for non-correlation to 0.25:


That gives a few more choices.

Below is the return of these commodity ETFs in 2009, from our live commodities tracking site.

These are the commodity ETFs names and trading volumes:

Note: You may receive technical analysis and alerts of these stocks, sent automatically to you, by entering the symbols in the Technical Trend Analysis Tool, (powered by INO).

Please see our related post on the Top Commodity ETFs for 2010 which looks at what is overbought and what is oversold.

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