DBC appears to be a new exchange traded fund which allows 'small investors' to easily and affordably play the commodities market basket for the first time.
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DBC appears to be a new exchange traded fund which allows 'small investors' to easily and affordably play the commodities market basket for the first time.
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Last edited by Melonie; 02-04-2006 at 09:55 AM.
I will bet that a third of the money going into this will be from people who do not even know what it is. The Reuters sucks as an explanation. The press release from DB explains it much better.
http://www.deutsche-bank.de/presse/e...ses_1016.shtml
Note if you will, how they stacked the deck in favor of this index by only back-calculating it to 1988. They specifically left out two very important periods, 1986 when oil prices tanked and 1981 when golf went in the toidy. Other than that, I hope DB fleeces a lot of stupid investors too dumb to release they can just buy stock in an oil company ,a gold miner, and Alcoa.



A basket of commodities. Don't put all your investments in one basket? Most metals seem like a good bet to go up. Alot of demand for appliances in India and China. Oil will go up up
and then down after the world adjusts and switches to some alternative fuels. For example in 1900 a good share of the transportation in the US was electric. Some electric cars, but many electric trolley lines which were fast and reliable. Suddenly with a car in every pot in 1950 the electric trolley lines were gone by 1960. Electric cars are not out of the question to replace oil driven engines in the US. The point is you might invest
in the commodity futures or stocks rather than this sort of amorphous basket. Sounds like
the bad version of a mutual fund in which the commodity will be valued every day and
put at market every day. With commodities holding through a market cycle and not panicing might be helpful rather than the mark to market every day.





Well in theory I agree on commodity futures. However, in the 'real world' investing in commodity futures first requires a commodities trading account ... which is a whole different animal from a stock/bond brokerage account, involving a different broker, involving a (typical) $10,000 minimum deposit, and where the commodity volumes involved in a single contract are large ex. the Aluminum contract currently runs over $2,600 and ex. the Gold contract runs over $56,000 . Thus in order for a small investor to directly get into the game with the six commodities offered in the DBC ETF, the minimum buy-in would be 'huge'.he point is you might invest in the commodity futures or stocks rather than this sort of amorphous basket
Of course, many individuals who do purchase commodity futures do so on margin (i.e. with borrowed money) with as little as 10% down, but just as when one purchases stock shares with borrowed money the risk factors of taking a total loss increase in direct proportion to the percentage financed. Thus on a 10% down commodity futures purchase, if the commodity experiences a 10% decline in price your contract is worthless - which IMHO make this sort of commodity futures trading a pure speculation rather than an investment.
As to purchasing the stocks of ex. Aluminum or Gold mining companies as an easily purchased 'proxy', the risk factor here is that the stock value is based on the profitability of the mining company and not necessarily on the price of the Aluminum or Gold they are mining. All sorts of other variables affect the profits and therefore price of mining stocks, from labor and energy costs, to currency exchange rates, to the 'grade' of tomorrow's ore versus the ore mined yesterday, to unforseen events' (i.e. strikes, cave-ins, nationalization), to the wisdom or stupidity of company management, to the success of new mine exploration programs. Thus the correlation between the stock price of an individual mining company and the commodity price of the Aluminum or Gold they are mining is tenuous at best. Same applies to oil companies albeit to a lesser degree (remember Shell's share price dropping big time on 'ficticious' oil reserve estimates ?)
Again, I do own a silver mining company at the moment ( WTZ ), and I have owned the stocks of both Aluminum and Gold mining companies in the past, but I consider these to be a high risk speculation not a long term investment because of the extreme price volatility that all of these companies exhibit compared to the underlying commodity price.
Which brings us back to DBC shares. It would appear that DBC is in essence a low cost method for small investors to actually purchase a direct 100% correlation 'proxy' for futures contracts in the six commodities DBC covers, but with an investment of a few thousand dollars (i.e. $2,500 for 100 shares of DBC) versus ponying up hundreds of thousands of dollars in order to actually purchase the commodity futures contracts themselves at same % weighting as DBC and with the same risk factors as DBC (i.e. outright ownership not margin financing). Maybe I'm wrong about this, but DBC appears to offer small investors their first real opportunity to play in the same game that the 'rich' have kept to themselves for years !
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Last edited by Melonie; 02-05-2006 at 06:34 AM.
Sorry Melonie,
But you are 15 years behind the times.
Goldman Sachs has had a tradable commodity index since 1991.
http://www.futuresindustry.org/fimagazi-1929.asp?a=1037
... and there are now 6 vehicles to play the game with.
Commodities are a game best left to professionals. Amatuers are suckers who get burned. While an actual contract is more expensive, and stocks in the companies are not perfectly correlated with price, actual companies are 5X safer to invest in than nothing more than pieces of paper revalued daily, not that they are a rational investment for most people.





Sorry Melonie,
But you are 15 years behind the times. Goldman Sachs has had a tradable commodity index since 1991.
... and there are now 6 vehicles to play the game with.
quoted from your link in reference to the 6 vehicles you mention :
"The most common way to invest in a commodity index is to use over-the-counter instruments such as swaps and structured notes. The payout is usually based on the total return of a selected index, and a number of large derivatives dealers actively engage in trading and structuring these instruments.
A small number of funds also are available to U.S. retail investors, including Pimco’s Commodity Real Return Strategy Fund, Oppenheimer’s Real Asset Fund, and the Rogers International Raw Materials Fund. The Pimco fund relies mainly on commodity swaps. The Rogers fund puts all assets to work directly in the futures markets, while the Oppenheimer fund relies on both futures and OTC instruments for its commodities exposure."
You're the expert here, so I'll let you tell me the hoops a small 'retail' investor must go through, and the minimum investment amounts a small 'retail' investor must pony up, in order to actually purchase a swap or structured note tied to the Goldman Sachs index !
I'm also aware that, as the article states, there have been a small number of commodity based mutual funds out there which ARE available for purchase by small 'retail' investors through normal brokerage accounts. However, these are mutual funds not an index fund, which makes them A. subject to much higher management fees, B. dependent on the wisdom of a fund manager to select various company stocks, commodity options and derivatives, C. subject to 'reweighting' i.e. 'oil is rising too quickly in price so that it's dollar value is becoming too high of a percentage of my mutual fund ... so I'll have to sell oil (before it peaks) and buy pork bellies instead to stay within the rules of my mutual fund's charter (even though it means sacrificing profits)"
Are you talking about US dollar denominated money market funds ? Sorry, but you left the door wide open ...... investing in (snip) nothing more than pieces of paper revalued daily
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Last edited by Melonie; 02-05-2006 at 04:53 PM.
Melonie,
A very small investor (with say less than 75K income and $50K assets) cannot buy futures contracts. They will not be able to buy these either in all likelihood. Every member of the commodity futures association is under the same rules (2-30) concerning the suitability of investments. I looked on Lind-Waldock's (major commodity broker) web site and could not find the specific rules. There may be more folks allowed to trade this since it is not leveraged, but someone with $25.00+ commisison is not going to be buying this without the rigamarole. If you only have $50 you should be investing in gasoline futures by filling your gas tank more often, not buying futures.
Try opening a bank account. You have to have a drivers license and a credit card. Try to get a driver's license, you have to have a checking account with the address printed on it or a utility bill. You won't get a utility bill for 30 days, but have 30 days to get your license converted. You have to have a drivers license to get a credit card. ( I just looked at MAss regs because my wife is going to be moving her DL from RI to MAss)
For the record, damn few money market funds have ever "busted the buck" by having less assets than the face value of accounts. The time frames of mmf investments are so short, that this is hard to do.
As for rebalancing, read the link above--the DB is reweighted annually. It is 100% true, as you note, that there are lower transaction costs than commodities mutual funds. those costs will be born by paying a comission on the transaction to your brokerage fiem which would eat away any gain on s mall account as well, just like going into Merril Lynch and buying 1 share of McDonalds.





Well this was my point exactly ... that prior to the advent of commodity based exchange traded funds like DBC and it's predecessor GLD, that small 'retail' investors like myself were effectively 'priced out' of participating in the commodities markets directly, and were forced to accept two very inferior alternatives in order to participate in commodity based profits at all - i.e. expensively managed specialty mutual funds with a somewhat poor correlation to the underlying commodity price, or miner/producer company stocks with an even poorer correlation to the underlying commodity price.A very small investor (with say less than 75K income and $50K assets) cannot buy futures contracts. They will not be able to buy these either in all likelihood. Every member of the commodity futures association is under the same rules (2-30) concerning the suitability of investments.
So even though the Goldman Sachs Index has existed for 15 years as you pointed out, there was (and still is) no way a small 'retail' investor could actually afford to trade on it ! As I posted earlier, besides virtually every futures contract broker requiring a $10,000 up front investment just to open a futures brokerage account, the dollar amounts involved in the outright purchase of just a single futures contract on a single commodity or index typically involves 5 figures.
the 'tin foil hat' crowd would point out that the 'good ol' boys' who previously had the commodity / futures markets as their exclusive territory are none too happy with the approval of GLD (which allowed small 'retail' investor money to indirectly enter the gold futures trading market), and are even less happy with the approval of DBC (which allows small 'retail' investor money to indirectly enter not only gold, but aluminum, oil etc futures trading market). Scuttlebut further has it that these 'good ol boys' are strenuously opposing the approval of a new exchange traded fund for silver.
Well, my comment was referring to the purchasing power/exchange rate of the US$, implying that in the past it was possible for investors in US$ denominated money market funds to lose purchasing power with each passing day, and that arguably this is again happening right now as the 'real' cost of living increases faster than the interest rate the money market funds are paying increases the value of the investment.For the record, damn few money market funds have ever "busted the buck" by having less assets than the face value of accounts. The time frames of mmf investments are so short, that this is hard to do.
The 'tin foil hat' crowd would point out that the vast majority of Americans still cling to an old paradigm that the US dollar's value can still be used as some sort of a valid reference i.e. if the future US dollar value of an investment will be 5% higher next year than it was last year that said investment 'made money'. However, in today's globalized world, with globalized commodity prices, the US dollar has become a 'moving target' ... such that having 5% more US dollars next year compared to this year may in fact represent a significant loss in terms of purchasing power, 'real' value, or however you want to refer to it.
Canadians. Mexicans etc. have long understood the role of the exchange rate i.e. global value of their currency being a 'moving target', since a significant amount of their purchased items always consisted of imported goods ultimately priced in a currency other than their own. However, Americans have failed to grasp the 'moving target' concept even though a vast amount of our purchased items now consist of imported goods ultimately priced in a currency other than the US dollar. In fact it is arguable that global commodity prices are the only valid yardstick of purchasing power, 'real' value etc. in today's world of infinitely printable new money and manipulatable exchange rates.
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Last edited by Melonie; 02-05-2006 at 09:14 PM.
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