Articles

Commodities – outlook and opportunities

Hans Goetti of Finaport looks at some of main opportunities and challenges in different commodities against the backdrop of today’s volatile market environment.

Date: Sept 2011

Tags: Commodities, Gold, Agriculture, Oil

  • Perhaps the strongest safe-haven currency is now gold, with key characteristics that it cannot be printed, it is not backed by any counterparty, and it has an intrinsic value
  • In terms of other metals, they are dependent on the economic cycle, so investors should be cautious
  • Agricultural commodities will be part of a long-term trend, given that there is less and less arable land, and that the dietary needs of the emerging markets are going up in the long run
  • Energy presents another long-term opportunity, driven by investment demand, spare capacity and political risk

According to Hans Goetti in an interview, with so much volatility at the moment, investors have to ask themselves what their reference currency is and how they measure their portfolio performance against that currency.

The world is running out of safe-haven currencies, he explained, pointing to the Swiss franc announcement as the latest example.

Perhaps the strongest safe-haven currency is now gold, said Goetti, with key characteristics that it cannot be printed, it is not backed by any counterparty, and it has an intrinsic value. As a result, he said he sees gold being a safe-haven currency more than it is a commodity.

Gold as a currency

To reduce the high levels of debt which now exist in the world, it can either be repaid, or defaulted on, or printed away, explained Goetti.

Given that repayment isn’t possible given the amounts, and with default considered to be too painful, Goetti said the only option is to print it away – and that devalues paper currencies in relation to gold. As a result, gold keeps its value and paper currencies decline relatively to the gold price.

Goetti said gold has been a currency for the last 2,000 years – and it has kept its purchasing power for at least that period of time.

Investing in other metals

In terms of other metals, Goetti said these are more for industrial use. For example, copper is extremely dependent on the economic cycle, but he sees the economic cycle slowing everywhere.

And given that China accounts in some cases for up to 50% of demand for certain metals, Goetti said he is very cautious about metals at the moment.

Outlook for soft commodities

Goetti said he likes agricultural commodities as part of a long-term trend, given that there is less and less arable land, and that the dietary needs of the emerging markets are going up in the long run. Water is another attractive option.

However, when investing in food commodities, Goetti said there could be an ethical issue. For example, when there is a lot of investment demand for food commodities, it puts a strain on the emerging markets where food accounts for a relatively large part of people’s income.

Opportunities for energy

Energy presents another long-term opportunity, added Goetti, driven by three things: first, investment demand, depending on central bank policies; secondly, spare capacity, which he said could disappear by 2013 or 2014 as demand from emerging economies is so great; and thirdly, political risk, which is hard to quantify, but can emerge at any moment.

Accessing different commodities

To take advantage of commodities trends, investors can buy equities in companies in the commodities space, said Goetti. For instance, food-related, fertilizer or farm equipment stocks.

There is also the option of exchange-traded funds, he added. Investors can also use futures to access commodities.

 

 
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