There’s an old cliché that says when it comes to the markets, the trend is your friend. And investors who followed that principle in commodities made a killing last year, as everything from copper to oil posted double-digit gains. So far this year, though, the major commodity indexes are in negative territory. And that raises a question: Is the trend still your friend?
As a class, commodities tend to zigzag independently of stocks and bonds, and many advisers recommend some exposure to raw materials for the long run. Hard assets like gold may also protect against a spike in inflation or a weakening dollar, since the metal often moves in the opposite direction. But prices for raw materials are prone to big short-term swings, and after last year’s run, some pros say commodities are hardly a sure thing. Prices for wheat and soybeans are well off their highs, for instance, thanks to strong harvests and slack demand. Meanwhile, the prices of oil and natural gas have slumped, making it tougher to profit off energy. “It’s more of a rifle shot to make money now,” says Jeffrey Christian, founder of CPM Group, a commodities-research and -management firm.
One wild card: China. The country’s construction boom has propped up prices for industrial commodities. But Beijing is trying to put the brakes on its economy, and metals such as copper could stay under pressure before rebounding in late 2010, says Helen Henton, head of commodities research at Standard Chartered Bank in London. “We need demand elsewhere in the world to recover,” she says.
Gold could lose some luster too. Investors recently bid up its price to over $1,240 an ounce, triple its level in 2004. But prices are also driven by demand for jewelry, and there was a 397-ton glut of gold on the market in 2009, up from 75 tons in 2008, according to VM Group, a London-based commodities-research firm. Without more buying by investors and central banks, the price of bullion could plunge, says Jon Nadler, a gold analyst with the Canadian firm Kitco.
Headwinds aside, investors who want exposure to commodities have lots of options. Several exchange-traded funds invest in commodities futures contracts. Prices for those contracts may diverge from the commodity itself, however, and investors can lose money even if the commodity price stays flat, says Morningstar analyst Bradley Kay. One ETF that avoids that problem is the SPDR Gold Trust (GLD: 120.99, +1.39, +1.16%). It holds the physical assets in a vault and more closely tracks the price of gold.
Some mutual funds also invest in natural resource stocks, which might do well if economic growth picks up. Companies can add value by finding, processing and marketing the raw material, says Howard Simons, a commodities strategist at Bianco Research. Many of the stocks pay dividends, which can offset losses if the commodity price falls. “That can be worth more than the natural resource itself,” says Simons.
