So far in 2008, commodity prices have continued to soar, most notably gold, which has been hitting record price levels. James Burton, CEO of the World Gold Council, observes, ‘It is encouraging to see such a positive start to the gold market in 2008. It is evident that gold’s unique investment attributes as an effective safe haven and dollar hedge have resonated with investors at this time of uncertainty.’

He adds, ‘In today’s markets, investors seek exposure to gold for many reasons. Gold is a portfolio diversifier and a hedge against inflation, and brings exposure to the dollar, so there are several compelling arguments for investing in gold.’

Booming demand
As a result of sustained price rises across a range of commodities, demand for commodity-based ETFs continues to grow dramatically. Nik Bienkowski, head of listing and research at ETF Securities, says that ‘Industry fundamentals remain positive for most commodities. However, continued equity market volatility combined with economic uncertainty regarding inflation and growth are positive for many commodities. The continuing effects of the sub-prime crisis, with Citigroup and Merrill Lynch raising up to another US$18 billion (£9.2 billion), add to the flow of negative news surrounding the financial markets.’

He adds, ‘It is during these times that commodities and precious metals often outperform, particularly given gold’s safe-haven status and the fact that the demand for many agriculture commodities is recession proof. As a result, ETF Securities has experienced record growth of exchange-traded commodities (ETCs) over recent weeks, with precious metals, agriculture and soft ETCs experiencing the greatest demand. This demand for index rather than individual commodity exposure reflects investors’ desire to allocate to commodities in order to enhance portfolio diversification.’

Bienkowski states, ‘Historical returns show that, due to commodities’ low correlation with equities, they tend to outperform equities when equities experience negative returns. On average, when equities experienced a negative 12-month return, commodities, about 70 per cent of the time, showed a positive 12-month return.’

Turning to softs
Hans Ruiz, manager of the ABN AMRO Consumer Goods Fund, points out that ‘In 2007, food commodity prices rocketed. The price of wheat doubled in US dollar terms while the price of soya, milk powder, cocoa, coffee and corn have risen 70 per cent, 50 per cent, 27 per cent, 16 per cent and 13 per cent respectively.’

He explains, ‘Supply-side factors are part of the story. Adverse weather conditions, for example a drought in Australia and rains in Europe, have led to poor wheat harvests in particular. But the real drivers are on the demand side. Better living standards in China and India, home to nearly 2.5 billion people, cause diets to change in these countries.
People are eating more meat, and the implications for grain demand are huge.’

Ruiz highlights the impact of the developing biofuels sector on soft commodity prices. ‘Cars need fuel and oil reserves are dwindling. Ethanol made from corn or sugar cane is an alternative to petrol. To add to the market pressure, governments are starting to subsidise the cultivation of fuel crops. This leads to higher corn, sugar, wheat and soya prices. All these crops are competing for the planet’s finite supply of arable land.’