Go for Gold. But don’t dump other commodities

February 24, 2009

Commodity Online
NEW DELHI: Except gold, nobody wants to invest in any commodities now. Investors are shying away from commodities now as they badly burnt their fingers after putting their money in commodities like crude, metals and agri goods.

But, is it prudent to dump commodities altogether? That is the question haunting millions of investors across the globe.

And, common wisdom says that investors should make use of the opportunity they have got during the times of recession. Almost all commodities are down in the dumps. And, those who want to invest long term should go for commodities now so that they can make good profits once the world economy gets back its foothold.

That may happen once the US economy shows some surge after the stimulus package takes effect. Barring gold, both hard (metals, crude oil, etc) and soft (farm) commodities have fallen from record high levels witnessed in the first-half of 2008.

Crude oil, which soared to an all-time high of $147 a barrel in July last year, is currently traded at $30 levels.

While the commodities bull run commenced in the early part of this decade, many investors, who put their money into commodity funds towards the end of 2007, have seen their wealth all but evaporate. So, they are like once bitten twice shy situation.

But those who want to invest long term can see this as an opportunity. The US economy will claws its way out of a recession and, in turn, spurs growth in emerging economies. Then, commodity demand will begin to look up.

This makes beaten-down commodities an attractive proposition from growth and portfolio diversification points of view.

In India, except for the gold exchange traded funds (ETFs), there are no other commodity ETFs to invest in. This means that if an investor has a bullish view on crude, the option open for that person is to buy a commodity futures that is traded on bourses such as the Multi Commodity Exchange of India (MCX) or the National Commodity & Derivatives Exchange (NCDEX) or to invest indirectly into the commodity by purchasing an energy scrip such as ONGC, IOC or BPCL that are listed on stock exchanges.

Indian mutual funds do comprise certain products that invest in Indian and global commodity stocks. The problem here is that barring SBI Comma Fund, which has a three-year track record, other funds are relatively new. Reliance Natural Resources Fund, for one, is just a year-old.

Further, buying into commodity thematic funds exposes an investor to risks that exceed those associated with investing only in the underlier.

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