If you can eat it or burn it, you can invest in it. But the big question for distributors and investors in commodities must be: are they are buying at the top of the market?The latest commodities story dates back to 2003, when the first signs of a buying spree arose as emerging markets economies - notably China - emerged from financial crisis with a thirst for oil, metals, and lots more besides. Other emerging economies followed, and Russia started to get rich on the other side of boom as it turned its energy sector into a licence to print money.
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.
More on Structured Products
Chris Leone and Dushyant Chadha replace Paul Galietto
Steffen Scheuble says growth in mainstream strategies may be nearing saturation point
Capital-at-risk product pays out early if crude index is no lower than strike price in 30 months’ time
Investors’ capital at risk if underlying is below barrier level at maturity
Sign up for Risk.net email alerts
Regulation and low interest rates pose greatest challenge
Winners from the Structured Products Europe 2013 talk about the challenges of regulation and the increasing appetite for hybrid products
Structured Products spoke to Dimitris Melas, Global Head of New Product Research at MSCI about a new innovation in indexing – factor investing.
Structured Products spoke to Gareth Parker, senior director of index research, design & development of Russell Indexes at Russell Investments’ as it launches the Russell UK Mid 150 Index.
There are no comments submitted yet. Do you have an interesting opinion? Then be the first to post a comment.