By: PETER FISHER
Peter Fisher is a Financial Consultant with Blacktower Financial Management Group.
WHAT ARE commodities, why should you invest in them and how do you do it?
As current stock market conditions remain volatile and the once safe haven of property is having problems, where can you invest to obtain a return better than cash investments, especially during periods of increasing inflation?
One area which is growing in popularity is investing in commodity funds. But what are they?
Commodity funds are an interesting, and potentially rewarding, way to diversify your investment portfolio beyond stocks, property and bonds. That is because commodities are often viewed as a hedge against inflation, meaning the prices of commodities tend to rise in step with inflation. This movement tends to run counter to stock prices – which is an attribute that makes commodity funds so attractive to many investors.
Historically investors have always invested in oil, gold and precious metals especially during stressful times but opportunities now exist for investors to include other products in their commodity portfolios.
In general, commodities are defined as things that tend to come from the earth or are grown. This includes grains, minerals and metals, livestock, cotton, oils, sugar, coffee, and cocoa. A relative newcomer and addition to the above is investment in water.
Commodities and Inflation
Commodities are closely tied to the health of an economy and inflation specifically. That is because most commodities are quickly consumed and therefore prices are directly tied to the cost of living. Due to this inherent characteristic, commodities are often on the upswing during inflationary times and this creates a natural hedge for stock prices.
The market price of most stocks goes down when inflation is rising, as has been shown especially over the last few months.
Why are commodities currently rising in value?
Apart from rising with inflation, many commodities are becoming scarce. This is clearly seen with recent oil price rises, the increase in cereal prices and the increasing scarcity of water. This is potentially one of the most important and overlooked commodities.
In some countries with insufficient water for self-sufficiency, food already accounts for up to 35 per cent of imports. Groundwater reserves are diminishing across 60 per cent of Europe and infrastructure to meet the needs of a growing population is sadly lacking. (Source: Sustainable Asset Management)
This is summed up in the fact that, in 1995 when the world population was 5.7 billion, 92 per cent had sufficient water. It is predicted by 2050, when the population will be around 9.4 billion, only 56 per cent will have relative sufficiency.
So it’s no surprise that the water companies leading the charge in solving the water supply crisis stand to make legendary profits. A few water companies have already gained over 1000 per cent in the past few months. And to be sure, there will be plenty more profits to come.
The world is experiencing the same problem with food production, especially cereals. As the world populations increase so does the demand for food. There is a massive shortage of cereals in parts of the African continent and this is further compounded by the use of cereals in producing Bio Fuel.
Oil has slid from 147 US dollars to below 130 a barrel in the last few days. This is due to a number of factors but mostly the slowdown in demand from both the US and China. Many market analysts agree that oil will continue to slide to 100 US dollars as the global economic boom weakens. But, given Asia’s continuing industrialisation, demand is still likely to double in the next 12-15 years and with ongoing supply problems, the current slide should prove merely to be a correction in a long-term bull run.
The term ‘precious metals’ immediately brings to mind metals like gold and silver. Both have reasons to continue with their increase in value.
However, investment in metal commodities now also include ultra high-strength and super-light steels which are the ‘plastics’ of the 21st century. There is high demand for these steels for use in everything from jet engines to rail components.
How do you invest in commodities?
Traditionally, direct investment in commodities was limited to the very wealthy and institutional investors. You can of course also buy shares in the companies involved in mining, agriculture, water etc. But how do you select the winners from the losers?
In recent years there have been a growing number of collective commodity investment funds launched by respected fund managers. This has allowed individual investors easy access to this exciting market without the need of experience, knowledge or deep pockets!
Also, these funds provide professional management for a minimal cost. A ‘managed’ fund manager will constantly monitor and adjust the spread and diversity of the commodities held within the fund in order to minimize risk and maximize performance potential. With some of these funds, there is no annual management fee unless the fund shows a positive return.
Commodity fund performance
Performance of different funds will of course vary and just like equities, the performance of commodities can be volatile. Nevertheless, against the backdrop of falling share and property values, recent commodity fund performance has been quite phenomenal.
One such fund is the Aliquot Agricultural fund which, in the year to June 30, has produced an amazing positive return of 49.99 per cent!
Given the reasons above, commodity funds are still likely to provide positive returns in the coming months. However, please bear in mind that they should only form part of any investment portfolio. Their value can go down as well as up and you should always seek professional advice.
Please contact Peter Fisher of Blacktower Group for further information. Call
289 355 685 or email [email protected]