It’s been hard to miss the runaway success of gold, which recently topped $1500 per ounce for the first time. Inflationary threats, together with the uncertainty in global financial markets, has increased demand for the precious metal in recent years and the growing numbers of middle-class consumers in China and India are helping to underpin prices.
It might seem logical to assume that other physical assets – or commodities as they are known in market-speak – would also benefit from the growing demand from ‘emerging’ economies. The markets for everything from oil to cocoa, silver, copper, sugar and coffee are growing – making it even more difficult to produce enough of these finite resources to satisfy demand. Does this make investing in commodities a ‘no-brainer”? Not quite.
Commodities may have proved a stellar asset in performance terms recently but May’s ‘flash crash’ was instructive in terms of highlighting the volatility of individual commodities. For example, silver, which had climbed to almost $45 per ounce at the end of April, plunged to below $35 dollars per ounce only days later. The price of Brent Crude, the oil benchmark, also plummeted and many other commodities, including copper, sugar, cotton and cocoa, were dragged down in their wake.
While oil and gold swiftly regained some strength following the ‘mini-crash’, other commodity prices remain subdued at the time of writing. The reasons for this difference in performance are many and various. Moreover, the outlook for individual commodities varies greatly. For example, continuing unrest in Libya could mean continued volatility for oil, although gold’s stability may continue to be supported by investors keen to buy in the ‘dips’.
This highlights the importance of understanding the volatility and risk of the underlying assets held within your funds, to ensure they still match your attitude to risk. A glance at Trustnet’s analysis of unit trusts which are listed within the ‘commodities’ sector reveals huge differences in areas of investment. Some are made up almost exclusively of gold, mining and precious metal-related shares. Others may include anything from agricultural chemicals to meat, fish, dairy and palm oil – with each commodity displaying varying characteristics in terms of volatility and predicted demand.
As ever ‘caveat emptor’ – or speak to your financial adviser.
You should not use past performance as a suggestion of future performance. The value of investments can fall as well as rise.