As commodities prices reel around on a sea of volatility this month, investors are hanging on for the ride and trying to figure out how to curb their losses.
According to strategists and portfolio managers from Goldman Sachs, ETF Securities, Standard & Poor's, LPL Financial and WFS Funds, investors can move their money into everything from equities to exchange traded funds to mutual funds to options. The key, of course, is finding the right niche within those markets.
Gold's story has been a volatile one since last week when it dropped, then rallied early this week, then dropped again later in the week. As of Thursday, Comex gold futures for June delivery fell $4.70, or 0.3%, to $1,497 an ounce following a 1% loss on Wednesday.
Silver, meanwhile, also declined Thursday after showing signs of recovery earlier in the week following a 30% downward plunge last week. On Thursday, Comex silver for July delivery fell $1.64, or 4.7%, to $33.92 an ounce. Silver had tumbled 7.7% in Wednesday's session.
Why Commodities Have Plummeted
Commodities' suddenly sharp volatility is the result of weak reports on U.S. unemployment and weekly jobless claims, and underscored by Federal Reserve Chairman Ben Bernanke's insistent view that rising prices are out of line with what he considers to be low underlying inflation.
"The Wednesday before last week's commodities drop, Bernanke was saying he was worried about mid-term inflation, not short-term. He said commodities were overextended, and wow, two days after Bernanke spoke, the bubble burst," said Randy Warren, chief investment officer of WFS Funds for Warren Financial Service, Exton, Pa., which runs two institutional products for pensions, endowments, foundations, trusts and family offices.
Further, says Goldman Sachs Asset Management's Chairman Jim O'Neill, the global economy is likely to encounter more "mini periods of volatility," where
rising commodity prices, food and energy in particular, choke off some economic activity as consumers and business adjust to higher costs.
"In countries where overall inflation rises more because of these rising prices and central banks tighten monetary policy, subsequent tightening financial conditions will slow down growth and probably lessen their contribution to the demand for the commodities in the first place," O'Neill writes in "Can Equities Rally Without Commodities?," a viewpoint published on May 7.
"It appears as though we might be going through such a period right now," O'Neill continues. "Suddenly, economic data in many economies has disappointed, and while there could be a number of explanations, it seems quite feasible that the degree of increase in energy and food prices might be a guilty culprit."
O'Neill concludes that if equities are to develop another leg to the rally that has been taking place since 2009, it will probably have to be led by something other than commodities. And more commodities weakness in the near term wouldn't be that surprising either, he adds.
What Does Commodities Volatility Mean for Investors?
If gold tracks the classic bubble pattern, and it has so far, instead of plunging, it may double in value this year, according to Jeff Kleintop (left), chief market strategist for LPL Financial. However, he does not believe that gold – or commodities in general—is in a bubble and most likely will not continue to track the classic pattern. But he does see potential for further modest gains for precious metals and other commodities in 2011, to be accompanied by volatility.
"Gold's rally is now just entering its tenth year, historically the best year for gains," Kleintop writes in a market comment published Monday. "It is worth noting
Silver's volatility shouldn't put investors off the precious metals market altogether, said Will Rhind (left), managing director of 
