Commodities have been in and out of the investment spotlight for the last year. I think they are back in for loose money looking for somewhere to live.
But the broad strength of commodity prices may also reflect the appeal of the sector as an “alternative asset”, along with hedge funds and private equity. Ever since the dotcom bubble burst, investors have been keen to diversify away from their traditional focus on equities and government bonds. That has led to the launch of a whole series of exchange-traded funds based on commodities, which have made the asset class accessible for a much wider range of investors; the latest example, from Barclays Global Investors, is a fund based on timber prices. And Wall Street has been gearing up to meet demand; a survey by Options Group, a recruitment consultant, found that the hiring rate of commodity traders is up 33% on last year.
The recent credit crunch may have given commodities a further lift. Speculative money that had been flowing into high-yield bonds and structured credit is now looking for a new home. Some commodities, particularly gold, are also seen as a hedge against a declining dollar.
Robin Bhar, a metals strategist at UBS, says investors seem to feel they have an each-way bet on commodity prices. Either global economic growth is strong and supply remains tight, or the world slips into stagflation, as it did in the 1970s. In either case, commodities should perform well. [More]
This interest in commodities carries over to farm real estate as well, I think. I have long believed (mostly to justify my own decisions) that land is superior investment. All it takes is a few of the very wealthy to agree with me to support what seem to be astronomical prices for dirt.
What many of us have trouble wrapping our mind around is how much wealth there is in the world, and the very real problem of what to do with it. The real world and real stuff like commodities and land contrast well to the abstract and barely comprehensible investment competition like derivatives or (shudder) CDO's.