Desiring double-digit hot trades

There’s no denying that commodities are shaping up to be the favoured asset class, with gold, oil and copper proving particularly attractive. Fiona Bond discovers how to make the best return


Geopolitical tensions have sent the oil price soaring while gold is up 14 per cent this year already after netting its 11th consecutive annual gain in 2011.

Julian Jessop, chief economist at Capital Economics, says: “Most commodity prices have made a strong start to 2012, helped by increasing hopes that the US will lead a strong recovery in the global economy, declining fears of a ‘hard landing’ in China and faith that a disorderly Greek default can be avoided.”

The increased optimism for global economic prospects has seen industrial metals’ star rise sharply, with zinc, copper, aluminium and nickel all racking up double-digit percentage gains.

Its shinier counterparts - gold and silver - have followed suit, with Mr Jessop predicting that gold could rise to as much as US$2,500 per ounce by the end of next year thanks to its quality as a safe haven amid the market volatility.

But what goes up must come down, as the saying goes, and this particular asset class is no stranger to the unpredictability of the global markets. Indeed, commodities have endured more ups and downs over the past 12 months than a rollercoaster, as markets have been torn between conflicting economic data, fears of geopolitical tensions and the threat of a double-dip recession.

However, rather than deter investors, it is this very volatility that makes them so attractive to trade. Barclays Capital has estimated that commodity investments may grow by as much as £25.5 billion (US$40 billion) this year, following the weakest inflows last year since 2002, amid an increase in appetite for oil, gold and copper.

Increased optimism for global economic prospects has seen industrial metals’ star rise sharply racking up double-digit percentage gains

Not only is accessing the commodities market easier than some might have you believe, they can also fit in with most investment strategies. Colin Cieszynksi, senior market analyst at CMC Markets, says: “There are a number of strategies that can be used when trading commodities. Many traders look to trade off of news developments that can change expectations, such as a weekly inventory report for oil in the US or economic data and monetary policy changes in China for the likes of copper.”

The pattern is all too easy to see: following Beijing’s decision to lower its growth forecasts for 2012, copper sunk 3 per cent while ongoing fears for sanctions on Iran have kept oil prices buoyant.

A second strategy is “pairs trading,” whereby the trader takes a long position on one commodity and a short on another, in effect speculating that one will outperform  a method that has proved particularly popular among oil contracts. Trading contracts with differing expiry months of the same commodity is also a nifty trick as traders attempt to take advantage of changing attitudes over different time horizons.

There are various others ways to ride the commodities coat tails, be it through spreadbetting, contracts for difference (CFD) or the more traditional equities route. Equities have long been the staple for long-term retail investors and, despite the recent downturn in the stock market, have proved fairly lucrative. Spreadbetting is another investment strategy which allows the investor to go long or short on market prices, making it possible to profit even when prices are falling.

But be warned - it’s not for the faint-hearted.

Outlook for gold

ANALYSIS With economic uncertainty likely to remain on the horizon for some time to come, Kevin Rose asks can gold continue its stellar performance?

With gold having been the destination of choice throughout the eurozone debt crisis, a question mark now hangs over whether the shiny commodity can continue to deliver. Fears over sovereign debt default, solvency of the banking system and global recession may have driven the price up in recent months, but can it continue to do so?

Jonathan Bristow, a broker at Valbury Capital, says: “While the persistence of very low or even negative real interest rates continues to erode the wealth of those holding cash on deposit, gold is going to remain an attractive investment option, especially since gold has risen for ten years in a row and has returned on average 18 per cent with no down years.”

While it would be easy to get carried away, let’s not forget the property market of a few years ago when it was almost unthinkable that house prices could fall, having seen them rocket year after year. With this in mind, it is perhaps no surprise that some are looking elsewhere for shelter.

David Coombs, head of multi-asset investment at Rathbone Unit Trust Management, says he now believes that US bonds provide a more attractive hedge to a sterling investor than gold. He explains: “Price momentum has dropped in recent weeks, and with quantitative easing having possibly ended in the US and tighter monetary policy on the cards, the yellow metal is a lot less interesting.”

The price of gold looks set to remain volatile while there are ongoing concerns about the global recovery. As chartered financial planner Adrian Pickersgill says: “Even if we are on the road to recovery, the huge amount of new money pumped into the financial system will have to be repaid.”