Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
There’s always been a case for holding some portion of a well-diversified portfolio in commodities. But right now, the asset-class is finding itself the centre of much wider attention. A combination of favourable macro conditions and governments’ investments in green infrastructure is inspiring hopes that a new commodities “super-cycle” is on the horizon.
Now that’s all well and good, but when it comes to investing in commodities, there’s a seldom-acknowledged secret shared among investors - not many of us know how to do it. After all, it’s not immediately clear where to find exposure to, say, copper.
For investors looking for answers, here’s your need to know about what’s generating the interest and how commodities might fit into your portfolio.
Commodities are the building blocks for economic growth. Consequently, the fortunes of both tend to go hand in hand. Today’s rapid growth and inflation expectations are fertile conditions for commodity prices.
Many of them have now clawed their way back from last year’s nadirs. Copper, for example, is up 80% since the March market low. Zinc is more than 50% higher. Last week tin rose to a seven-year high, up 70% on its low point last year. Oil prices hit $60 a barrel, finally recovering to pre-pandemic levels.
Each commodity tells its own story, but what’s remarkable about this recent rally is its universality. Recent price rises are driven by a combination of increasing demand and low supply - many miners simply stopped digging when demand dried up last year, meaning they’re having to play catch up to keep up with reopening economies.
Beyond these short-term drivers, there’s a sense that this cyclically driven recovery can extend into a fully-fledged “super-cycle” like that of the 2000s, which saw commodities ratchet higher over a period of years.
There are a few reasons for this. The first involves inflation. When inflation expectations rise, investors look to real assets like gold as a store of value. And while commodity producers often raise their prices in line with inflation because their cost of production goes up, holding the commodity gives investors a way of hedging against the effects of inflation.
Conversely, low yielding bonds and equities trading on high valuations leave little wriggle room for an onset of inflation, hurting these asset classes by comparison.
While the relationship between commodity prices and inflation isn’t clear-cut, and inflation certainly does not necessarily entail rising prices, commodities have historically outperformed when inflation has picked up. Super-cycles tend to follow periods of loose central bank policy like that we’re experiencing now.
Perhaps most encouraging for commodities’ prospects right now is government stimulus packages targeting green infrastructure programmes. Roads, bridges, rail links, solar parks and wind farms will be heavy consumers of industrial commodities, along with some precious metals like silver.
Similarly, widespread production of electric vehicles will drive demand for metals like platinum and copper, at the expense of fossil fuels. These are long term structural shifts to which it will take a while for commodity supply to catch up. Buoyed by renewed short-term enthusiasm, a longer-term case for commodities is emerging.
Will prices continue to rise?
Simply put, no one knows. At the best of times, we can’t be certain what’s going to happen to markets. That’s especially true right now, given the (sorry) “unprecedented” times.
Vaccine-fuelled optimism is making a lot of assets look rosy right now - but optimism alone is not enough to support a super-cycle.
In truth, it’s too early to call this the start of a super-cycle. The 2000s super-cycle was inspired by China’s rapid economic expansion - during which growth sometimes exceeded 10% per annum - and there’s little sign that the coming green revolution will travel as quickly.
China still counts for over half of international demand for commodities. For this cycle to become super, China will need to play a part. Yet the country has already begun to wind back some of its post-pandemic stimulus levels. Lower spending in China would be bad for commodities globally.
This is a volatile sector. World events, government regulation and changes to the global economy all have an impact on commodity prices and can be hard to gauge in advance.
Irrespective of today’s uncertainties, commodities have always appealed from a diversification perspective. Holding a range of assets that act differently from each other can help manage volatility. It’s all about keeping at least some cylinders firing at any one time - uncorrelated assets are a good way to do this.
When it comes to commodities, investors often only need small exposure to capture gains that offer meaningful diversification from other asset classes.
How do I invest?
If you’re not sure, don’t worry, you’re not the only one.
One way in is through holding individual mining companies, several of which feature on the FTSE 100 index of the UK’s largest companies. Familiar names include Glencore, Anglo American and Antofagasta. Some of these have recently announced appealing dividend payments off the back of renewed demand - BHP, the world’s largest miner, last week announced a record dividend as profits hit a seven-year high. The company operates by a policy to distribute at least half its underlying attributable profit to shareholders.
Another way in is through investment trusts, such as the BlackRock World Mining Trust, which invest in other mining companies. Investment trusts are closed-ended companies that trade on a stock exchange and issue a fixed number of shares. That structure allows them to keep a long-term focus without worrying about meeting investor redemptions.
If you’re looking to invest in physical gold or silver, an easy way to do so without having to buy and store actual bullion bars is through an exchange traded fund, otherwise known as an ETF. Like a tracker fund, these aim to track the price of the precious metal in a cost-effective way. Ones with a commodity focus include iShares Physical Gold ETC and WisdomTree Physical Silver.
And, of course, there are always funds which offer diversified exposure. Our Select 50 choice of favourite investments currently features the Ninety One Global Gold Fund (formerly Investec Global Gold), which invests in global gold mining companies and physical gold ETFs.
Five year performance
|(%) As at
|Brent Crude Oil||54.9||18.3||0.3||-23.4||28.5|
Past performance is not a reliable indicator of future returns
Source: Refinitiv, in US dollar terms as at 31.01.21
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.