Importance of Covariance between Agri-Food Prices and Gold

By: Ned_W_Schmidt

Prices are influenced by two forces. Inflation, caused by monetary expansion, is an increase in the general price level. That influence is felt directly though domestic prices rising and through a depreciating national money forcing imported prices higher. Additionally, prices on a relative basis can change. In the Agri-Food sector both influences have been felt. Prices for Agri-Food commodities have moved higher on a relative basis as a massive global demand shift has occurred.

Economic expansion in BRIC, Brazil, Russia, India, & China, is increasing demand for higher value Agri-Food products. A falling dollar, in which most commodities are price priced globally, has also contributed to rising Agri-Food prices. In this week's graph the ratio of the Schmidt Base Agri-Food Index divided by the price of $Gold is plotted. When that ratio is rising, Agri-Food prices are rising more than $Gold's price.

As the chart portrays, Agri-Food prices have risen faster than the price of Gold. Gold can defend a portfolio against the wrath of monetary inflation and a depreciating national money. It is, perhaps, not always the best defense against the movement of relative prices, such as Agri-Food or oil. An asset improves a portfolio's wealth characteristics if it offers higher returns and that return is uncorrelated with return on remainder of portfolio.

Agri-Food commodities may offer, at a minimum, a return competitive with Gold at this point in time. And importantly, the covariance between Agri-Food prices and Gold is running at zero at the present. Investors interested in defending their wealth against the ravages of rising prices should consider combining Agri-Food investments with their Gold holdings.

By Ned W Schmidt CFA, CEBS

Copyright © 2008 Ned W. Schmidt - All Rights Reserved

AGRI-FOOD THOUGHTS are from Ned W. Schmidt,CFA,CEBS, publisher of Agri-Food Value View , a monthly exploration of the Agri-Food grand cycle being created by China, India, and Eco-energy. To review the most recent issue go to http://home.att.net/~nwschmidt/READFOOD.html

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