Sure, Gas Prices Are High Now, But You Might Get It All Back When You Retire, Or Maybe Not?
Submitted by CARPE DIEM
1-Year Return: DJ Commodity Index vs. DJIA
WASHINGTON POST — Soaring fuel prices that are burning a hole in the wallets of consumers are not only benefiting oil companies and Middle Eastern producers. They are also lighting up the investment returns of pensions funds, which millions of ordinary Americans are counting on for their retirement (see chart above that compares the +40% return over the last year for the Dow Jones Commodity Index to the -20% annual return for the Dow Jones stocks).
California’s public employees’ pension fund, the world’s largest, made its first investment of $1.1 billion into oil and other commodities early last year, and since then, Calpers has seen it soar 68%. Fairfax County pension managers have enjoyed a 61% return from a similar move over the past 12 months, far outpacing any other segment of the fund’s portfolio.
Other pension funds are rushing to get in on the action as the prices of oil, precious metals, corn, uranium and other vital goods continue to reach record highs. Montgomery County officials are in the process of shifting 5% of their $2.7 billion pension fund away from stocks and into commodities.
These funds are part of a tidal wave of investment dollars that has flooded commodity markets in recent years and, critics say, contributed to the run-up in prices.
Investors, including pension funds and Wall Street speculators, have sharply increased their commodity allocations since 2003, from $13 billion to $260 billion, making financial actors an even larger force on these markets than farmers, airlines, trucking firms and companies that buy and sell the physical goods to run their businesses.
For decades, trading commodity contracts was considered taboo by most pension funds because the market is so volatile and risky. Most fund managers relied on their stock and bond investments to enlarge their pools of retirement money.
That changed after the stock market crashed in 2001. Fund managers realized they needed more diversified portfolios that would perform well regardless of whether stocks did. At the same time, new financial products simplified trading by allowing big funds to buy into commodity indexes, which work like mutual funds, that were run by Wall Street firms.
MP: Sure, you’re paying higher prices at the pump today, but you might get it all back when you retire, since record-high commodity prices might significantly boost the return on your retirement portfolio?
Well maybe not, see this Boston Globe story “Investors’ Anxiety Builds as Retirement Nest Eggs Show Cracks.”
HT: Ben Cunningham
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July 8th, 2008 at 10:45 am
It is true that institutional investors are reallocating their portfolios to include a proportion exposed to commodities.
With the strength of commodity markets predicted to be maintained for at least the remainder of this decade, long term investors are beginning to see commodity trading as a form of asset allocation.
And what about crude oil prices?
There is another angle to the high crude oil price, and it is not just a matter of loopholes exploited by smart commodity futures traders and others.
Has anyone looked at the imbalance between the light, sweet crude oil and the heavy, sour grades, predominantly produced by the Middle Eastern membrs of OPEC?
While the surge in crude oil prices is reflects the rise in the US benchmark, the NYMEX West Texas Intermediate spot price, in the futures markets, it does not tell the supply side story.
There is a supply shortage of light, sweet relative to heavy sour. The demand for unleaded gasoline is relevant because this is a distillate of the light sweet grade.
So no matter if Saudi Arabia promised to increase daily output by 300,000 barrels at the recent Jeddah Oil summit, unless it is all light annd sweet, the problem will remain.
And that is what happened, the price of NYMEX WTI went up after the announcement.
So the answer is to increase refining capacity that is designed specifically to process the heavy,sour crude oil which can then meet the demand for unleaded gasoline.
What do you say?