A Weak Dollar Can Make Commodities More Profitable

By Wade Hansen

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The dollar’s dominance is not guaranteed in the global marketplace. As the markets rally and economic growth emerges, investors are selling the dollar against the other major currencies. In fact, the US Dollar index (the dollar versus a basket of international currencies) has broken out of a consolidation pattern to the downside today. The index is approaching the lows seen in late 2008.

[VIDEO] A Weak Dollar Can Make Commodities More Profitable

One of the drivers for the dollar’s depreciation today includes a report from several major oil exporting and importing countries planning an end to the convention of pricing oil in dollars. Changing the pricing conventions like this could lead to a falling dollar and higher oil prices in dollars. This could be a great opportunity for commodities investors. There are some great ways to take advantage of that potential through commodity and dollar ETFs without having to become a futures trader.

Diversification vs. Broad Diversification

Many individual investors are starting to look outside of the U.S. stock market for opportunities to diversify their portfolios, and one market that has received an increasing amount of attention during the past few years has been the commodity market.

Investors like the commodity market because it is not highly correlated with the stock market—which is good for those looking for diversification in their portfolios.

However, there is a difference between diversifying part of your portfolio into a commodity or two and diversifying your portfolio across the entire commodity market.

Commodity ETFs

Individual investors now have unparalleled access to the commodities market thanks to the growth and development of exchange-traded funds (ETFs). ETFs provide easy access at a relatively low cost.

Here’s the thing with commodity ETFs though. Some commodity ETFs invest in individual commodities, like gold (GLD) and oil (USO), while other commodity ETFs invest in the entire commodity market (DBC).

If you really want to be diversified in your portfolio, consider using a commodity index ETF instead of a single commodity ETF. You will experience less volatility in your portfolio, and you will have fewer funds to manage.

Image courtesy kteague.