Commodities anyone?

What asset class does the following?

1) Gives you diversification over and above cash, stocks and bonds
2) Benefits from the falling dollar
3) Benefits from increasing infaltion and rising prices

well you guessed it - commodities. With the dollar on its way down, prices on their way up and global demand for commodities spurred on by red hot growth stories in the emerging markets, desh included, does it make sense to add a touch of commodities to your long term portfolio?

Take a look at the long term returns of the Dow Jones commodity index (^DJC) as compared to the Dow Jones Industrial Index (US stock - ^DJI) and the Vanguard short term bond index (VFSTX). Click on image below to enlarge



Looks like the overall performance of the commodity index falls somewhere in between (that of stocks and bonds). Also, if you look at this chart across shorter timeframes, you can see that commodities have their own cycles of ups and downs and are loosely corelated with the stock and bond cycles, which gives you good diversification.

There are quite a few ETFs and ETNs that track various commodity indices

1) GSG - iShares S&P GSCI Commodity-Indexed
2) DBC - PowerShares DB Commodity Idx Trking Fund
3) DJP - iPath Dow Jones-AIG Commodity Idx TR ETN
4) GSP - iPath S&P GSCI Total Return Index ETN

I'm leaning towards DJP. Its well diversified across all commodities - precious metals, energy, agriculture products you name it and is also tax efficient. Haven't pulled the trigger yet tho.

Comments are always welcome.