The retrenchment of money following the pricking of the internet bubble post-2000 released just some of the investor cash that sparked the interest of banks and financial advisers now forced to find somewhere to put their clients' money. And the latest financial crisis - which has scared buyers away from bonds, made them unsure of equities and shaken their faith in the housing sector - has further lubricated the glide upwards for commodities.
Bankers who have to market commodities have latched on to a further benefit. When it comes to selling commodities, all the advertising is done for them by both new and old media outlets. If oil rises, it makes the front page all over the world; if wheat rises, then news sources in countries like Italy will preserve a space on the front cover citing concerns over the rising price of pasta. The list goes on.
With such an overwhelming supply of products the problem for the buyer is simply deciding which one to choose. Oil? Wheat? Milk? Gold? What needs to be remembered is that the word commodities is easily bandied about, but describes an incredibly diverse selection of items. Oil is a proxy for inflation, apparently, while gold is proxy for currencies, and the demand for wheat follows still different patterns.
Two final points: there are a lot of people calling the top of the market as it starts to reach its production peak, and wishful thinkers might say equity markets have bottomed out and could therefore start to stage a full recovery. In either case, the diversification play driving most of the financial investments into the commodity sector must develop into a longer-term investment strategy before volatility scares speculators away.
- Richard Jory, [email protected]; +44 (0)20 7484 9802.
The week on Risk.net, August 19-25, 2016Receive this by email