Ole Hansen is a commodities specialist at Saxo Bank. He says the bull run in commodities may not be over, but investors should not have to accept widespread volatility:
With commodities prices on an extended rally, how do retail investors gain exposure?
There are two options: go for individual commodities or go more broad-based. I think a more broad-based approach could be an answer for investors because you are starting to see a slowdown in the US economy which could mean weaker demand and lower prices. So I would look at some commodities indices.
Like what?
One of three. The S&P Goldman Sachs Commodity Index (GSCI) is energy-heavy with 60 per cent in energy-related futures contracts such as natural gas and Brent crude oil. The Thomson Reuters-Jefferies CRB Index varies commodities and looks at different sectors. The Dow Jones-UBS Commodity Index has a third weighting in each of three main sectors, energy, metals and agriculture.
How have these indices performed?
The GSCI has been the best performer because the energy commodities have done well in the past year, particularly Brent crude oil. The GSCI is up an average 8 per cent, which is obviously not the 40 per cent return you would have seen with just Brent. But you reduce the volatility and that volatility is something you want to avoid.
Say no to volatility. Like strangers.
You cannot put all your eggs in one basket. If you want to diversify away from stocks and bonds then you should take a diversified approach to commodities. You bring the potential return down but you bring volatility down also and you do not have to stay up at night wondering about your portfolio.
What if an investor is desperate to invest in a single commodity?
If you like singles then all the fundamental reasons for the rally in gold are still there. That could be an individual investment. There are sovereign debt worries in Europe, unrest in the Middle East, and negative real interest rates in the US, so gold is attractive at the moment. The opportunity cost of an investment in precious metals such as gold and silver is zero at the moment.
Some analysts say the price of gold is way above the intrinsic value in mining it.
At the end of the day, the price is what the investor is prepared to pay for it. The gold price correction in May was less than the previous three years. At this moment in time, I think investors are not willing to let the rally go.
Is it possible investors are a little too focused on commodities at the moment?
People's expectations about commodities need to be measured. It is not all commodities going in one direction. It is a mixed bag. That is why you should look at something like the UBS index. You can access it through an (exchange-traded fund) which is traded like a stock and has low fees.
* Rory Jones