November 26, 2004
By Jon Boone
Financial Times
Two of the biggest stories in world economics are helping to make commodities an increasingly attractive option for investors.
While rampant growth in China is sucking in resources and doing its bit to push up prices for virtually all raw materials, the wilting dollar is also helping, particularly in gold as individuals and central banks look to alternatives that will hold their value better.
According to the World Gold Council the demand for gold in the third quarter of this year was 6 per cent higher than in the same period in 2003. All of which can lead to excitable words from commodities analysts.
"It's a new world order for commodities as an asset class," says Michael Lewis, head of commodities research at Deutsche Bank.
"While we are pretty bullish on commodities we are negative on bonds and equities. Changes over the past decade have led us to a situation that is the complete opposite of the 1990s - rising interest rates and a much more hostile US macro picture. Geopolitically there is more risk aversion whereas the 90s saw big benefits from the peace dividend."
How then to choose between soya beans, copper and zinc or perhaps some orange juice futures?
Lewis recommends a strong allocation of energy to be sure of good returns, "If you had invested in the Deutsche Bank Crude Oil Index in 1992 it would have outperformed equities, bonds and every other asset class right the way through the dotcom period."
Stephen Marriott, fund analyst at Bestinvest, says that the trick with commodities is to diversify your exposure and recommends to his clients unit trust such as the JP Morgan Fleming Natural Resources Fund.
One way to get closer to the real thing, he says, is to invest in a product like the BGI Commodity Fund which tracks the GSCI index of 24 different commodity future prices. "It's pretty much for the wealthy though, because it requires an investment of $1m, but you could get exposure to through our discretionary service."
Another option is to start your own gold hoard, says Tony Baird, managing director of Baird Co, a gold dealer that offers an over-the-counter service as well as allocated accounts. He argues that gold is an excellent asset and believes it is likely to keep going up.
"The reason why we are so bullish is the vast amounts of dollars being held by all sorts of countries around the world. Eventually China and the EU will get the wake-up call that they are holding a rapidly depreciating currency and will want to start buying substantial quantities of gold."
In addition, he argues, mining companies, which spent the 90s selling un-mined gold forward on the bullion markets, are busily "de-hedging", thereby pushing up demand. "Some of the mines are very heavily sold forward and are now buying it all back as quickly as they can."
Would-be investors might also want to consider the non-financial inducement of what he describes as "collecting gold for gold's sake". Not only is it more manageable in a way that tons of corn or Brent Crude are not, Baird says collectors can burrow into the huge variety of gold coins available.
Not everyone is so keen on gold, with many believing it is already near the top of the market.
Gold is trading at multi-year highs, acknowledges Gavin Rankin, the vice president of investments at Citigroup private bank, but that will come to an end sooner rather than later.
"It's been one of those assets that investors [gravitate towards] because the momentum is on the upside and because it's a safe haven in a very uncertain time," he says. "But eventually that has to stop. Now that we're seeing a renewed [positive] sentiment toward equities, investors will move away from gold and go where the momentum is."
Tony Warwick-Kerching, metals analyst at Crewe International, would not advise retail investors to buy metals.
He says: "Two years ago, with hindsight, you would have had fantastic opportunities, but now metals will be of more use to hedge funds than to retail investors."
Additional reporting by Rebecca Knight.
http://news.ft.com/cms/s/e8e18560-3fc6-11d9-bd0e-00000e2511c8.html