Should you jump into commodities? aah.. these are questions that u should answer... bearing in mind the kind of risks you will need to bear.
The skyrocketing prices of commodities such as crude oil and gold have made this asset class a hot topic among investors. With commodity prices at historical highs, investors are wondering if the cycle has peaked. Some call it a commodities bubble that will burst soon.
Morgan Stanley economist Stephen Roach believes prices will tumble amid a United States recession and property market collapse. Others warn that commodities trading is the riskiest way to invest your savings because of the wild gyrations in prices.
But 'bulls' such as veteran US investor Jim Rogers beg to differ.'We are in a bull market for commodities that is likely to last beyond 2020,' he said. 'This is because supply and demand got terribly out of whack years ago.
It will take many years to build new capacity by opening new mines or discovering new oil fields.'In the meantime, prices will be pushed up as the available supply cannot satisfy the voracious appetites of emerging economies.
For the average retail investor, taking the middle-of-the-road approach is to assume that the fastest growth has already come and gone. So you should be more selective and pick commodities that are likely to enjoy a sustained plateau in prices, rather than those whose prices might spike temporarily and then flop over time..
So how can an investor get his toes wet without drowning?
Commodity indexes
THESE act like stock indexes, tracking a group of commodities for benchmarking and investing purposes. They are constructed and managed by various financial institutions. Since mid-1998, the Goldman Sachs Commodity Index has seen returns of 265 per cent and the Dow Jones-AIG Commodity Index 234 per cent.
Exchange-traded funds
FOR investors, exchange-traded funds (ETFs) offer exposure to gold, silver, oil, individual commodity sectors and broad-based commodity futures indexes. Take the Singapore Exchange's Lyxor ETF Commodities CRB, which is based on the Reuters/Jefferies CRB Index. It is made up of a basket of 19 commodities that range from energy, industrial metals and agriculture to livestock. Since it was listed in January, its net asset value has risen from US$2.71 to over US$4.04.
EMERGING market funds, which are Mutual funds, in particular, allow you to participate in the commodities boom by tapping the growth of countries blessed with raw materials. These include South Africa, which has the world's largest gold reserves; Saudi Arabia, which boasts the largest oil reserves; and Cuba, a huge sugarcane producer.Among the many options available are Schroder Investment Management's agriculture fund and alternative solutions commodity fund, the UOB United Global Emerging Markets Portfolio and Pimco's emerging markets bond fund.
Commodity-linked stocks
YOU can buy shares of Singapore-listed commodity traders and producers such as Indofood Agri, Golden Agri, Straits Asia Resources, First Resources and Wilmar. There are also commodity-related stocks such as those of oil-rig builder Keppel Corp. Investors take on both corporate and equity market risks when they buy into these stocks. They typically have a higher correlation to equity markets than commodity markets.
Reasons for investing in Commodities: They are considered a good hedge against rising inflation.The past few years of torrid growth in emerging economies such as China and India have created massive demand for a plethora of raw materials. That demand, in turn, has pushed up the prices of these commodities, faster than inflation.Commodities are also viewed as a powerful tool for diversifying one's portfolio.
Historically, they have a negative correlation with both stocks and bonds. In other words, when these fall in price, commodities tend to head north. In the past few months, while global stock markets plunged, prices of commodities such as gold, crude oil, wheat and palm oil have hit all-time highs. For those of you who are wary of sinking money into the stock market now, but do not want your cash to sit in a bank and shrink in value as inflation climbs above 5 per cent, commodities might be a good way to keep your savings intact. Financial advisers say a typical diversified portfolio might include 5 per cent commodities, 60 per cent stocks, 25 per cent bonds and 10 per cent Treasury bills.
FOR THE RISK-TAKING INVESTOR....
Buying directly into the future of energy, metals ..IF YOU are a relatively sophisticated investor aged 21 or over, you can open a derivatives trading account at most major brokerages such as Phillip Securities or DBS Vickers Securities. This will allow you to trade futures contracts on exchanges worldwide - from Bursa Malaysia's ringgit-denominated crude palm oil futures contract (FCPO) to metals contracts on the Chicago Board of Trade (CBOT) and the New York Mercantile Exchange (Nymex). A futures contract represents a financial obligation to buy a certain quantity of a physical commodity at a preset date and price. Most brokerages will let you deposit your funds in Singapore dollars or any other major currency. You can trade on futures exchanges and over-the- counter foreign exchanges on a margin basis, which means you can leverage so as to trade contracts with a larger nominal value. The margin is set to cover the price risk of the portfolio for a specified period.There are three categories: energy and metal futures, which generally mean 'hard' commodities, and agriculture futures, for 'soft' commodities. Energy OIL could soar to higher levels. But investors need to be well-versed in the price dynamics of the many varieties of oil contracts from light sweet crude to brent, which are traded on Nymex and the IntercontinentalExchange (ICE).
Metals
THE star performer last year was copper. Shortages due to inefficient excavation of old mines pushed up the price to over 360 per cent of the 2003 level. Some investors buy the stocks of big miners such as Freeport McMoRan and Southern Copper, but to do this, you need to open overseas trading accounts via your local broker. Copper plays into the popular investment theme of 'What China Is Buying'. China's rapid infrastructure development has made it the world's largest consumer of many metals, but you zoom in on the ones it needs to import. Zinc is abundant in China, while copper is found mainly in South America and tin in Indonesia.For aluminium, China used to rely on its own production, but it is likely to become a net importer this year. Said Standard Chartered commodity analyst Judy Zhu: 'The government clamped down on production a few years ago, so this may support global prices.'Many investors are going for gold because the weakening greenback has pushed prices above US$1,000 an ounce currently. But they might still have further to go.
Also, gold is more easily accessible investment-wise than some other metals. You can buy or sell physical gold such as gold bars, or gold certificates from banks such as the Canadian Bank of Nova Scotia and United Overseas Bank (UOB), but this attracts GST of 7 per cent.Singapore investors can use monies in their Central Provident Fund Investment Scheme-Ordinary Account(CPFIS-OA), but the sum cannot exceed the available Gold Limit, which is 10 per cent of the total CPFIS-OA funds. One thing to note is the high investment outlay for gold. A one-kilobar certificate can cost over $36,000.For sophisticated investors who want exposure to a variety of hard and soft commodities, ABN Amro is preparing to launch a call warrant that tracks the RICI Enhanced Global Index, an index designed by the bank and veteran investor Jim Rogers.It will be based on the RICI, a commodity index developed by Mr Rogers in 1998 that covers 37 commodities and has generated returns of more than 500 per cent since July 1998.Called zero strike participation certificates, or zero certs, the warrants have an exercise price of zero. If the index goes up by $1, the issue also gains $1, which makes it easier to track the performance of the index and calculate capital gains. Each zero cert has an initial price of about $1; the minimum investment is about $1,000.
Soft commodities
THIS is a growing investment theme because consumers in China and India are wolfing down more food as standards of living rise. For instance, estimates put the wheat consumption of these two countries at as much as 39 per cent of the world's total supply.In addition, with the 'green' movement, legislation in some places such as California has pushed farmers to grow corn not for food but to make ethanol-based energy products.But beware the extreme volatility in the prices of soft commodities, including coffee, palm oil and rice, which spoil easily. Palm oil producers, for instance, who have a huge harvest might have to dump it on the market within a few weeks before it rots.A savvy farmer might hedge his crop by selling futures contracts to lock in the price at which he will sell the palm oil. This hedging activity, combined with natural harvest cycles and unpredictable weather, can generate extreme swings in prices. Corn prices could test new highs if demand for ethanol-based energy sources continues to soar.
Unconventional plays
SOME off-the-beaten-track investments with upside potential include uranium and palladium.Some experts say uranium prices are likely to go 'nuclear' in a few years as traditional sources of energy such as oil and coal run out and 'cleaner' sources such as uranium trump more expensive ones such as ethanol-based energy.There are indications that global demand for uranium might surge in a few years. As of the middle of last year, there were 30 nuclear plants under construction globally, while another 70 had been planned and 150 more proposed. Meanwhile, supply from uranium mines and decommissioned nuclear weapons is limited.Palladium recently made a popular debut as the new 'platinum' in jewellery, especially in the China market because it is cheaper for jewellery buyers to use while providing immense profit margins for manufacturers.Consumption by the jewellery industry has more than tripled over the past two years, rising to 1.13 million ounces a year.
The skyrocketing prices of commodities such as crude oil and gold have made this asset class a hot topic among investors. With commodity prices at historical highs, investors are wondering if the cycle has peaked. Some call it a commodities bubble that will burst soon.
Morgan Stanley economist Stephen Roach believes prices will tumble amid a United States recession and property market collapse. Others warn that commodities trading is the riskiest way to invest your savings because of the wild gyrations in prices.
But 'bulls' such as veteran US investor Jim Rogers beg to differ.'We are in a bull market for commodities that is likely to last beyond 2020,' he said. 'This is because supply and demand got terribly out of whack years ago.
It will take many years to build new capacity by opening new mines or discovering new oil fields.'In the meantime, prices will be pushed up as the available supply cannot satisfy the voracious appetites of emerging economies.
For the average retail investor, taking the middle-of-the-road approach is to assume that the fastest growth has already come and gone. So you should be more selective and pick commodities that are likely to enjoy a sustained plateau in prices, rather than those whose prices might spike temporarily and then flop over time..
So how can an investor get his toes wet without drowning?
Commodity indexes
THESE act like stock indexes, tracking a group of commodities for benchmarking and investing purposes. They are constructed and managed by various financial institutions. Since mid-1998, the Goldman Sachs Commodity Index has seen returns of 265 per cent and the Dow Jones-AIG Commodity Index 234 per cent.
Exchange-traded funds
FOR investors, exchange-traded funds (ETFs) offer exposure to gold, silver, oil, individual commodity sectors and broad-based commodity futures indexes. Take the Singapore Exchange's Lyxor ETF Commodities CRB, which is based on the Reuters/Jefferies CRB Index. It is made up of a basket of 19 commodities that range from energy, industrial metals and agriculture to livestock. Since it was listed in January, its net asset value has risen from US$2.71 to over US$4.04.
EMERGING market funds, which are Mutual funds, in particular, allow you to participate in the commodities boom by tapping the growth of countries blessed with raw materials. These include South Africa, which has the world's largest gold reserves; Saudi Arabia, which boasts the largest oil reserves; and Cuba, a huge sugarcane producer.Among the many options available are Schroder Investment Management's agriculture fund and alternative solutions commodity fund, the UOB United Global Emerging Markets Portfolio and Pimco's emerging markets bond fund.
Commodity-linked stocks
YOU can buy shares of Singapore-listed commodity traders and producers such as Indofood Agri, Golden Agri, Straits Asia Resources, First Resources and Wilmar. There are also commodity-related stocks such as those of oil-rig builder Keppel Corp. Investors take on both corporate and equity market risks when they buy into these stocks. They typically have a higher correlation to equity markets than commodity markets.
Reasons for investing in Commodities: They are considered a good hedge against rising inflation.The past few years of torrid growth in emerging economies such as China and India have created massive demand for a plethora of raw materials. That demand, in turn, has pushed up the prices of these commodities, faster than inflation.Commodities are also viewed as a powerful tool for diversifying one's portfolio.
Historically, they have a negative correlation with both stocks and bonds. In other words, when these fall in price, commodities tend to head north. In the past few months, while global stock markets plunged, prices of commodities such as gold, crude oil, wheat and palm oil have hit all-time highs. For those of you who are wary of sinking money into the stock market now, but do not want your cash to sit in a bank and shrink in value as inflation climbs above 5 per cent, commodities might be a good way to keep your savings intact. Financial advisers say a typical diversified portfolio might include 5 per cent commodities, 60 per cent stocks, 25 per cent bonds and 10 per cent Treasury bills.
FOR THE RISK-TAKING INVESTOR....
Buying directly into the future of energy, metals ..IF YOU are a relatively sophisticated investor aged 21 or over, you can open a derivatives trading account at most major brokerages such as Phillip Securities or DBS Vickers Securities. This will allow you to trade futures contracts on exchanges worldwide - from Bursa Malaysia's ringgit-denominated crude palm oil futures contract (FCPO) to metals contracts on the Chicago Board of Trade (CBOT) and the New York Mercantile Exchange (Nymex). A futures contract represents a financial obligation to buy a certain quantity of a physical commodity at a preset date and price. Most brokerages will let you deposit your funds in Singapore dollars or any other major currency. You can trade on futures exchanges and over-the- counter foreign exchanges on a margin basis, which means you can leverage so as to trade contracts with a larger nominal value. The margin is set to cover the price risk of the portfolio for a specified period.There are three categories: energy and metal futures, which generally mean 'hard' commodities, and agriculture futures, for 'soft' commodities. Energy OIL could soar to higher levels. But investors need to be well-versed in the price dynamics of the many varieties of oil contracts from light sweet crude to brent, which are traded on Nymex and the IntercontinentalExchange (ICE).
Metals
THE star performer last year was copper. Shortages due to inefficient excavation of old mines pushed up the price to over 360 per cent of the 2003 level. Some investors buy the stocks of big miners such as Freeport McMoRan and Southern Copper, but to do this, you need to open overseas trading accounts via your local broker. Copper plays into the popular investment theme of 'What China Is Buying'. China's rapid infrastructure development has made it the world's largest consumer of many metals, but you zoom in on the ones it needs to import. Zinc is abundant in China, while copper is found mainly in South America and tin in Indonesia.For aluminium, China used to rely on its own production, but it is likely to become a net importer this year. Said Standard Chartered commodity analyst Judy Zhu: 'The government clamped down on production a few years ago, so this may support global prices.'Many investors are going for gold because the weakening greenback has pushed prices above US$1,000 an ounce currently. But they might still have further to go.
Also, gold is more easily accessible investment-wise than some other metals. You can buy or sell physical gold such as gold bars, or gold certificates from banks such as the Canadian Bank of Nova Scotia and United Overseas Bank (UOB), but this attracts GST of 7 per cent.Singapore investors can use monies in their Central Provident Fund Investment Scheme-Ordinary Account(CPFIS-OA), but the sum cannot exceed the available Gold Limit, which is 10 per cent of the total CPFIS-OA funds. One thing to note is the high investment outlay for gold. A one-kilobar certificate can cost over $36,000.For sophisticated investors who want exposure to a variety of hard and soft commodities, ABN Amro is preparing to launch a call warrant that tracks the RICI Enhanced Global Index, an index designed by the bank and veteran investor Jim Rogers.It will be based on the RICI, a commodity index developed by Mr Rogers in 1998 that covers 37 commodities and has generated returns of more than 500 per cent since July 1998.Called zero strike participation certificates, or zero certs, the warrants have an exercise price of zero. If the index goes up by $1, the issue also gains $1, which makes it easier to track the performance of the index and calculate capital gains. Each zero cert has an initial price of about $1; the minimum investment is about $1,000.
Soft commodities
THIS is a growing investment theme because consumers in China and India are wolfing down more food as standards of living rise. For instance, estimates put the wheat consumption of these two countries at as much as 39 per cent of the world's total supply.In addition, with the 'green' movement, legislation in some places such as California has pushed farmers to grow corn not for food but to make ethanol-based energy products.But beware the extreme volatility in the prices of soft commodities, including coffee, palm oil and rice, which spoil easily. Palm oil producers, for instance, who have a huge harvest might have to dump it on the market within a few weeks before it rots.A savvy farmer might hedge his crop by selling futures contracts to lock in the price at which he will sell the palm oil. This hedging activity, combined with natural harvest cycles and unpredictable weather, can generate extreme swings in prices. Corn prices could test new highs if demand for ethanol-based energy sources continues to soar.
Unconventional plays
SOME off-the-beaten-track investments with upside potential include uranium and palladium.Some experts say uranium prices are likely to go 'nuclear' in a few years as traditional sources of energy such as oil and coal run out and 'cleaner' sources such as uranium trump more expensive ones such as ethanol-based energy.There are indications that global demand for uranium might surge in a few years. As of the middle of last year, there were 30 nuclear plants under construction globally, while another 70 had been planned and 150 more proposed. Meanwhile, supply from uranium mines and decommissioned nuclear weapons is limited.Palladium recently made a popular debut as the new 'platinum' in jewellery, especially in the China market because it is cheaper for jewellery buyers to use while providing immense profit margins for manufacturers.Consumption by the jewellery industry has more than tripled over the past two years, rising to 1.13 million ounces a year.
