Experts predict commodities bubble is about to burst
Speculation about an imminent commodity crash has been mounting after Glencore, one of the world's largest commodity suppliers, announced plans to float on the stock exchange.
"With one of the biggest commodity companies floating, you have to ask if it's a signal of what's to come and whether Glencore is shrewdly selling before the bubble bursts," says Gavin Haynes, managing director of Whitechurch Securities.
"We are relatively cautious with commodities because there's been such a long run and they look a bit overbought at the moment," he adds.
Justin Modray, founder of Candid Money, however, remains skeptical about the idea of a commodities bubble, especially given the bumpy nature of commodity prices. "It's hard to tell for sure because one week prices drop but they can then go up again just as quickly," he says.
Modray expects commodity prices to stay healthy for up to 30 years, thanks to a burgeoning middle class in the emerging markets. "As well as factories producing goods and using more energy, consumers are using more energy, buying cars and so on," he says. "Also, these areas tend to be where most gold is bought by consumers."
Investors looking for exposure to commodities need to accept that this is a high-risk specialist area that should only make up a small fraction of their portfolio. "Exchange traded funds are straightforward in that they simply track the prices of commodities," he adds.
However, Haynes warns investors against opting for ETFs unless they have sufficient knowledge, claiming the pricing mechanism is very sophisticated. "A more sensible approach is to choose funds that invest in commodities," he says.
Haynes suggests JPM Natural Resources, which includes a range of companies involved in commodities production, or BlackRock World Mining investment trust, which has 10% invested in physical metals.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.