The spotlight is on the commodities sector right now. With most countries struggling with the worsening pandemic as new Covid-19 strains make their way around the world, a commodity boom is on the horizon. The reason for this rally is the pent-up demand for raw materials as countries look to rebuild their economies and the disruptions in supply from manufacturers and suppliers getting back on their feet after a lengthy lockdown. Although newer strains are pushing countries back into lockdown, recovery is expected as vaccine rollouts continue and businesses return to operation.
With material supply at a bottleneck, inflation is expected to rise in the coming months as manufacturers lower on the supply chain ramp up prices. Government stimulus packages to pump cash into the economy, like those carried out by the US and Malaysia, will push consumer demand, adding pressure on manufacturers.
The International Monetary Fund (IMF) has warned that the increase in inflation could be more than just transitory1. In the US, the CPI stood at 5.4% in June 2021, the fastest pace in almost 13 years. China’s PPI rose 9% year-on-year in July 2021, affected by price hikes for crude oil.
While all this is happening, the push for greener energy sources and green technology continues. The shift to green energy will push demand for raw materials such as copper, lithium and steel. The buildout of green infrastructure will also require lumber, steel, and other industrial materials, which could keep demand and prices for materials higher for years.
Commodities tend to outperform equities, by a large margin, when certain conditions come into place, as seen in the chart below which compares the S&P 500 to commodities.
The pandemic and lockdown badly affected oil prices. Demand dropped as businesses shuttered and people stayed home. Earlier this year, demand for oil picked up as countries emerged from lockdown and travel restrictions were eased. In the second half of 2022, OPEC (Organization of the Petroleum Exporting Countries) was expected to limit or delay production increases for the rest of the year. Over the past 12 months, oil prices have almost doubled, touching USD70 per barrel at the end of August 2021.
Despite a relatively flat movement so far this year, gold, another heavily traded commodity, has seen a huge appreciation in value over the past 12 months as investors looked for a safe haven following the pandemic.
Copper, after a correction in May this year, is building momentum. If we observe prices over a 12-month period, we can see that copper prices have nearly doubled. Copper is an essential raw material in electronics manufacturing.
Due to changes in supply and demand, commodity prices will fluctuate. For example, if mining companies are forced to cease operations, the price of metals will increase. If there’s a bumper crop of soy, prices will decrease. Some commodities, like gold, remain relatively stable, which is why it is used as a reserve asset by central banks. Overall, commodities are more volatile than stocks.
However, investors will choose commodities for the purpose of diversification because they have low correlation (prices do not move in tandem) to equities. Unlike traditional asset classes like stocks and bonds which tend to have a positive correlation, commodity prices are bet on unexpected inflation and so have little relation to the movement of equities.
Commodities are also a popular hedge against inflation. High inflation causes commodity prices to soar, while stocks and bonds tend to perform better in a low inflation environment. Because commodity prices typically rise when inflation is accelerating, they offer protection from the effects of inflation. Few assets benefit from rising inflation, particularly unexpected inflation, but commodities usually do. As the demand for goods and services increases, the price of goods and services rises as does the price of the commodities used to produce those goods and services.
There’s normally an inverse relationship between the value of the dollar and commodities prices. The prices of commodities tend to drop when the dollar strengthens and vice versa. The Commodity Research Bureau Index tracks the performance of a group of commodities against the value of the dollar.
By adding commodities to your portfolio, you effectively decrease your overall portfolio risk.
There are several ways to invest in commodities. As in the case of gold, you can buy the physical item in the form of gold bars, but there is a huge risk attached to owning a large quantity of gold, and the problem of not being able to sell the gold bar later on, or selling it at a huge discount.
You could trade in commodity futures, but a significant amount of capital and experience are required, and you’d have to bear the risk.
A safer way to trade in precious metals is to purchase paper gold/silver, which allows you to invest at market spot prices, at any amount, without having to keep the physical item. Paper gold/silver, due to its accessibility, is also highly liquid and can be traded at any time. RHB Multi Currency Account Gold and Silver investment allows you to do just that, while also allowing you to trade in 17 foreign currencies in one account. You can also accumulate paper gold by investing in a Dual Currency Investment (DCI) product.
While investing directly in commodities is a high risk-high reward endeavour, there is a way for investors to avoid some of that risk through funds that invest in companies that produce these commodities.
Investing through well-managed funds removes the need for legwork on your part, as fund managers have access to information and will make decisions that benefit you. Fund managers also manage all the paperwork for you. Funds are often preferred over shares or bonds as the units have a high liquidity and can be traded at any time, if needed. Compared with futures or directly buying shares in companies, the minimum initial investment is low and subsequent investment amounts are flexible.
The RHB Resources Fund is suited to investors who wish to capitalise on opportunities in the natural resources sectors and want an investment that is geographically well-diversified across the Asia Pacific markets. Risk-wise, it is suited to those who are willing to accept a moderate to high risk in their investments and target capital growth. The fund invests up to 98% of net asset value (NAV) in securities of companies whose businesses are in or substantially related to the natural resources sectors. The fund’s performance is benchmarked against a blended index which includes FBM Asian Palm Oil Plantation, Bloomberg Asia Pacific Mining and MSCI Asia Pacific Energy index.
For those keen on investing in companies involved in precious metals, energy, or base metals, you could opt for RHB Gold and General Fund. This fund is suited to the investor who is willing to accept a higher risk for potentially higher returns.
This fund aims to achieve returns on investment mainly in securities of corporations (whether or not listed on any stock exchange, and in any part of the world) whose business (in any part of the world) is or is substantially in the mining or extraction of gold, silver or precious metals (e.g. platinum, palladium, rhodium etc.), bulk commodities (e.g. coal, iron ore, steel etc.), base metals of all kinds (e.g. copper, aluminium, nickel, zinc, lead tin etc.), and other commodities (e.g. industrial minerals, titanium dioxide, borates etc.) and it includes the mining or extraction of oil, gas, coal and alternative energy or other commodities or other minerals.
At least 95% of the fund’s NAV is invested in units of the United gold and General Fund, and the remainder is invested in liquid assets.
RHB Gold Fund offers investors the opportunity to gain direct exposure to gold spot prices as the fund feeds directly into Blackrock’s iShares Gold ETF, which tracks the returns of gold spot prices. This fund is suitable for investors who want a targeted exposure to a single commodity’s price.
Overall, commodities should be part of a well-diversified portfolio. Discuss your options with your Relationship Manager to see which of the safer options best suits your needs and risk profile.
1 CNBC, IMF warns that inflation could prove to be persistent and central banks may need to act, Silvia Amaro, 27 July, 2021.
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The Manager wishes to highlight the specific risks of the RHB Resources Fund Fund are Currency Risk and Country Risk. The specific risks of the RHB Gold and General Fund are Market Risk In Global Markets, Foreign Exchange/Currency Risk, Political Risk, Derivatives Risk, Liquidity Risk in UGGF’s Investments, Small Capitalisation Companies Risk, Single Sector Risk and Commodities Risk. The specific risks of RHB Gold Fund are Management Risk, Secondary Trading Risk, Country Risk, Currency Risk, Investment Risk, Derivative Risks, Concentration Risk, Risk Related To Precious Metals Generally and Shortage of Physical Metals risk and other general risks are elaborated in the Information Memorandum.
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