Wheat, sugar, cotton and gold are arousing interest from investors across the globe.
By Paul Farrow, Personal Finance Editor
Published: 7:00AM BST 02 Oct 2010
Sugar prices are at a seven-month high
It wasn't so long ago that investors were extolling the virtues of hedge funds, private equity, currency swaps and infrastructure. But these newfangled alternatives have been knocked off their perch by investments that were being traded by City gents wearing tails and top hats more than a century ago.
Wheat, sugar, cotton and perhaps the oldest of all investments, gold, are grabbing the headlines and generating interest from sophisticated investors across the globe. The reason is rising prices. This week, sugar climbed to a seven-month high on concern that adverse weather will curb output in Brazil, the world's biggest exporter, and Australia, the third-largest.
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Cotton extended its rally to its highest price in more than 15 years, wheat prices have risen by 60pc over the past 12 months, while gold continues to attract investors worried about a global double-dip recession and its price hovers around a record high of $1,300 an ounce.
For many private investors investing in commodities is a novelty. Yet research published this week by JP Morgan suggests that people who do not have any exposure to commodities within their investment portfolios could be missing a trick or two.
"Commodities are the oldest asset class known to man, but perhaps one of the least understood today," said Rumi Masih, the global head of the strategic investment advisory group at JPM. "You can go back even further – one of the first investors known to profit from a commodity trade was the pre-Socratic Greek philosopher Thales (pictured), who, as Aristotle recalls, invested in oil presses near the ancient Ionian cities of Chios and Miletus early in the growing season one year and thus reaped the benefits of a bumper crop of olives."
Mr Masih's research found that commodities were a hedge against rising inflation and improved returns while reducing volatility. Commodities outperformed equities and bonds when economies were in a late expansion phase by 10pc and marginally outperformed when economies were in the early expansion phase just after a recession. The only time they lagged other assets was towards the end of a recession.
The commodity recovery story has been triggered by the supply and demand effect – quite simply, demand for many commodities outstrips supply as giant economies such as India and China march forward.
Even though the demand for metals has been rising, supply is tight – no new mine shafts have been opened in 20 years worldwide, according to JPM. The last iron ore smelter to be built in the United States dates back to 1969.
"The case for including commodities as one component of a diversified portfolio has become stronger in the wake of the 2008 financial crisis and amid the economic ascendancy of China," Mr Masih said. "There are significant supply constraints on commodities amid burgeoning demand for them, not only among developed nations and China but also from a broader swath of the developing world. This includes emerging economies in places as far afield as Africa, Asia and South America."
JP Morgan is not the only commodity bull. Commodity analysts at Standard Chartered estimate that nearly $200bn (£130bn) worth of investment projects were suspended as a result of the financial crisis in iron ore, copper, and coal alone.
Among soft commodities, particularly grains, disruptions to climatic patterns have again tightened supply. "This combination of medium-term demand-side pressure against the background of a limited short-term supply response in many commodities looks set to keep commodity prices supported," said Philip Poole, the global head of macro and investment strategy at HSBC Global Asset Management.
The question for investors is which commodities to buy and whether they are arriving too late to the party – as the graphs show that commodities have recovered from their 2008 falls. Commodities are volatile beasts – just ask investors who piled into oil stocks as crude marched towards $147 a barrel in 2008, only to come down with a jolt as the price plummeted to $60. Investors who bought exchange-traded funds following sugar, natural gas, zinc, cocoa and lead prices have seen the value of their investments fall by 10pc or more.
Evercore Pan Asset invests in commodity ETFs, but at present owns only two – ETF Securities Agriculture and iShares Timber. And it avoids gold. "We sold out of a general, 'hard' commodity ETF, which was a play on oil earlier in the year," said Christopher Aldous, the chief executive. "We have no way of understanding its movement. Its prices seem to be driven by speculators and we have missed out on the price rises – and we are not going to start chasing it now."
Legendary investor Jim Rogers, who set up one of the world's first hedge funds with George Soros in the Seventies, is also an advocate of commodities over the long term – although he warns investors not to simply buy those that have shot up in price in recent months. He recommends commodities that have not moved up that much. "Buy silver rather than gold, for instance, if you want to buy precious metal," he said. "I would like to buy coffee too. But there is still a huge potential [in general]. If governments are going to continue to print money, we are going to have higher prices for commodities."
http://www.telegraph.co.uk/finance/personalfinance/8036344/We-are-going-to-have-higher-prices-for-commodities.html
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