Should you jump into commodities?

'We are in a bull market for commodities that is likely to last beyond 2020. This is because supply and demand got terribly out of whack years ago. It will take many years to build new capacity by opening new mines or discovering new oil fields.' MR JIM ROGERS, speaking at a conference in Singapore recently

MR JIM ROGERS

March 16, 2008 : Should you jump into commodities?

The skyrocketing prices of commodities such as crude oil and gold have made this asset class a hot topic among investors. GRACE NG explores the trends in commodities investment and how you can incorporate it into your portfolio

FOR THE NEW INVESTOR

WITH commodity prices at historical highs, investors are wondering if the cycle has peaked.
Some call it a commodities bubble that will burst soon. Morgan Stanley economist Stephen Roach believes prices will tumble amid a United States recession and property market collapse.

Others warn that commodities trading is the riskiest way to invest your savings because of the wild gyrations in prices.

But 'bulls' such as veteran US investor Jim Rogers beg to differ.

Reasons for investing in commodities

THESE GOLDEN GRAINS REWARDED INVESTORS who spurned stocks and bonds for commodities last year with rich gains. Wheat prices surged to new highs on fears that supply would fall short.

Commodities have grown more alluring recently given skyrocketing commodity prices, rising inflation and plummeting stock and bond markets.

'We are in a bull market for commodities that is likely to last beyond 2020,' he said at a recent conference in Singapore. 'This is because supply and demand got terribly out of whack years ago. It will take many years to build new capacity by opening new mines or discovering new oil fields.'

In the meantime, prices will be pushed up as the available supply cannot satisfy the voracious appetites of emerging economies.

For the average retail investor, taking the middle-of-the-road approach is to assume that the fastest growth has already come and gone. So you should be more selective and pick commodities that are likely to enjoy a sustained plateau in prices, rather than those whose prices might spike temporarily and then flop over time.

Last year, more than US$40 billion (S$55.3 billion) was poured into assets that track commodity indexes, exchange-traded products and commodity structures, according to Barclays Capital data in January.

So how can an investor get his toes wet without drowning?

Commodity indexes

THESE act like stock indexes, tracking a group of commodities for benchmarking and investing purposes. They are constructed and managed by various financial institutions. Since mid-1998, the Goldman Sachs Commodity Index has seen returns of 265 per cent and the Dow Jones-AIG Commodity Index 234 per cent.

Exchange-traded funds

FOR investors, exchange-traded funds (ETFs) offer exposure to gold, silver, oil, individual commodity sectors and broad-based commodity futures indexes. Take the Singapore Exchange's Lyxor ETF Commodities CRB, which is based on the Reuters/Jefferies CRB Index. It is made up of a basket of 19 commodities that range from energy, industrial metals and agriculture to livestock. Since it was listed in January, its net asset value has risen from US$2.71 to over US$4.04.

Mutual funds

EMERGING market funds, in particular, allow you to participate in the commodities boom by tapping the growth of countries blessed with raw materials. These include South Africa, which has the world's largest gold reserves; Saudi Arabia, which boasts the largest oil reserves; and Cuba, a huge sugarcane producer.

Among the many options available are Schroder Investment Management's agriculture fund and alternative solutions commodity fund, the UOB United Global Emerging Markets Portfolio and Pimco's emerging markets bond fund.

Commodity-linked stocks

YOU can buy shares of Singapore-listed commodity traders and producers such as Indofood Agri, Golden Agri, Straits Asia Resources, First Resources and Wilmar. There are also commodity-related stocks such as those of oil-rig builder Keppel Corp.

Investors take on both corporate and equity market risks when they buy into these stocks. They typically have a higher correlation to equity markets than commodity markets.