Investing in commodities was once considered a fringe activity, with very few mainstream investors able to easily get exposure to commodities. But the stellar rises seen in recent years in oil, base metals, and some of the soft commodities, such as copper, have sparked investors’ interest in the sector once again.
Jeremy D. Baker, Senior Commodity Analyst at UBS who was in Cyprus last week to make a presentation on “Commodities: The driving forces behind” organised by UBS, Cyprus Rep. Office told the Financial Mirror in an exclusive interview that commodities are an excellent tool to improve returns and improve portfolio efficiency.
Every investor, big or small, can invest into commodity funds, as the bull-run on commodities is far from over. However, the investment should be made according to each individual’s investment horizon, financial situation and risk appetite.
With both China and India growing at breakneck speed, it’s hard to see how supply will ever be able to keep up with demand across a whole range of raw materials, says Baker who nevertheless cautions investors to brace for high volatility and big swings in markets.
“I want to stress that investing in commodities should be viewed as a core investment, with a minimum 5 year horizon,” says Baker, adding that “you don’t buy and sell these instruments on a daily basis.”
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Popular
In a low-return world, high yielding commodities have become popular. Well supported by seemingly powerful fundamentals on strong demand from
But after a strong run, there are conflicting arguments on whether commodity prices are due for a major correction, or after the recent dip, they will head higher.
“I believe that commodity prices are in a secular bull market. There will be corrections along the way, but we may have many years to go before this thing is over. Even though commodity prices have risen significantly, the bulk of investors have not invested while big investors like pension funds are just getting around to allocating money to commodities,” says Baker.
He explains that the price of commodities is fixed due to demand and supply, inventory levels and hedge fund/speculative activity. As for over-pricing, Baker says on an inflation adjusted basis, most commodities are not over-priced.
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Hedge funds
Baker insists that hedge funds/hard speculators follow price movement and may at times accelerate the move, but not the direction. Contrary to belief that hedge funds are in control, Baker says issues like demand/supply and inventory levels, followed and monitored closely by specialists are far more important issues.
Citing consumption and production issues on oil, one of the best known and popularly followed commodities, Baker says US oil production peaked in 1970 but consumption continued to rise, while China went from a net oil exporter to importer in the mid 1990’s and consumption growth is expected to increase.
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Benchmarks
For Baker, the main commodities that investors may follow or invest are oil (WTI, OPEC price), copper for all metals, gold and natural gas. The weather as well as technical charts are other considerations that play a key role in determining price. Weather is specially important on the soft commodities while technical analysis is heavily used by traders when venturing into oil and gold.
“There are so many issues that drive prices, which is why investors should leave commodities trading to professionals to handle,” says Baker, adding that for example on natural gas and oil, one consideration seldom noticed by average investors is the number of hot and cold days, which plays an important role on demand, hence prices.
Official comments by oil ministers, especially from the Saudi oil minister on production levels is likely to affect prices.
Interest rates and future expectations are also likely to play an important role in determining the price of gold, but not much on other commodities.
But the most important benchmark for Baker is the level of current and future expected growth in the economies of
“If you agree with me that China, India and the other nations will continue to grow at double digit rates, then you will agree that demand for many commodities from oil to copper to name a few will remain strong, driving prices higher,” says Baker, who insists that commodities should be considered as part of a diversified portfolio that includes equities, bonds and cash.
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