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Making good

It has been a volatile year for commodities and there have been some wild swings in prices. Since May, however, markets have calmed down slightly and resumed their ascent.

The Goldman Sachs commodity spot index has risen more than 20 per cent from its low point this year. A key contributor has been the fall in the US dollar, weakened by the likelihood of further quantitative easing from the Federal Reserve and the lack of a currency accord among the major economies.

Much of the recent focus has been on the agricultural sector, where a number of prices have climbed to multi-year highs. They include corn, wheat and cotton, which fetched its highest price since records were first kept 140 years ago. The surge has followed a series of weather-related crop failures of sufficient magnitude to prompt the United Nations Food and Agriculture Organisation to warn of the possibility of a food crisis.

But even after these price hikes, agricultural commodities remain attractive from an investor point of view.

Historically, returns from agricultural commodities have shown a low correlation to the economic cycle, particularly compared with commodities such as industrial metals. Demand for food is linked to long-term economic and demographic trends, one of the most conspicuous being the rise in household incomes in emerging markets and a concomitant move towards high-protein diets. This has made the sector popular among those looking for a defensive investment capable of long-term growth.

Away from the agricultural sector, the price of gold has rarely been out of the news, breaking through the $1,300 per ounce barrier in September. Traditionally a safe haven in times of investment uncertainty, gold is likely to benefit from the ongoing currency wars as nations devalue competitively with a view to boosting exports. Meanwhile, the rise in the oil price has reflected a broader global market recovery, one which has a strong correlation with the S&P 500 index.

More ups and downs are inevitable in coming months but as prices continue to climb, the long-term benefits of investing in commodities remain clear.

Lyndon Gill is investment director of multi-manager at Swip


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