The bull market in commodities has been so rapid that analysts warn that prices could soon take a tumble but the longer-term effects of the boom can still earn solid returns for investors.

The bull market in commodities has been so rapid that analysts warn that prices could soon take a tumble but the longer-term effects of the boom can still earn solid returns for investors. It is far too early to throw in the towel on the commodity story as a whole. Instead, investors must pick their shots more carefully to find ways of profiting from the impact of red-hot prices on sectors like farming, fertilisers, machinery and irrigation, analysts say. Brad Lambert, technical analyst for Trend Analysis, a UK-based consulting company, says the surge in prices of commodities such as wheat or gold makes technical analysts see ominous parallels with the dotcom boom of the 1990s. The price gains have been as steep as those of internet stocks during the previous decade. Many of the drivers of strong commodities, like India and China, are old stories and should have been completely factored into prices. What is now happening is fuelled to a great extent, he says, by speculation. “This looks like a classic boom-bust situation. It’s like what happened to tech stocks (in the 1990s), only ten years later,” he told WealthBriefing. He says a significant proportion of the long positions in commodity markets are held by classic “hot-money” investors such as hedge funds. This position is not sustainable, he said. As an example of how some large funds are getting nervous, HSBC Investments, part of HSBC, last month announced it had sold all its soft commodity exposure. Some prices, both hard and soft commodities, have already weakened from their recent peaks: spot gold, which rose to $1,023 an ounce in early March, has subsequently fallen by more than $100 per ounce. But recent declines still represent a relatively small retreat from an astonishing ascent. Wheat traded in the Chicago futures market rose by 129 per cent last year from a year before; palm oil rose by 90 per cent; cocoa rose by 42 per cent and rapeseed rose by 84 per cent, according to Merrill Lynch data. It is easy to see why commodity investors are smiling. The latest commodity to set records, prompting worries about hunger and political unrest, is rice. Rice, a staple foodstuff for three billion people, has hit fresh records in recent days. More generally, Bloomberg, the news service, points out that commodity prices are hitting their seventh year of gains and the UBS Bloomberg Constant Maturity Commodity Index of 26 raw materials has more than tripled over the past six years. With such sharp rises, there will be inevitable pullbacks, which is why it is smarter for investors to start trying to spot the second or third-wave effects of rising prices rather than punt directly on commodity prices, Mark Dampier, an advisor at Hargreaves Lansdown, the UK financial advisory, fund management and brokerage company, told WealthBriefing. “The trouble (with commodities) is that it is a long term theme which can go quiet for a while. To punt it for just six months or so would be just crazy,” he said. “But if you have a normal equity portfolio, there is nothing stopping a normal equity fund manager from playing the (commodity theme) anyway,” said Mr Dampier. Mr Dampier is positive, for example, about the recent launch of the Sarasin AgriSar Fund, a traditional long-only fund managed by Sarasin, the Swiss-based private bank. This sort of fund is a move from a pure play on commodity futures and spot markets to the “picks and shovels” side of the theme, Mr Dampier said. The wealth management firm Stenham, meanwhile, has rolled out the Stenham Global Resources Fund, a Guernsey-registered fund of hedge funds holding a basket of up to 15 strategies. Last year saw the launch of the Eclectica Agriculture Fund, a UK-based portfolio run by Hugh Hendry. Another example is the Schroders AS Agriculture Fund, which was closed to new investment money in February. For the moment at least, commodity bulls remain confident, such as Mark Mathias, chief executive of Dawnay Day Quantum. His firm has rolled out structured products linked to commodities markets and is bullish about the long-term case, even though there will be inevitable pullbacks in the short-run. In March, it launched the Dawnay Day Quantum Protected Agricultural Dynamo fund, for example, which runs until 2013. “If you’re a short-term trader, you have got to be concerned about pullbacks, but we are not a short-term outfit. We don’t try to make a one-day, one-month call on the market. Of course, the market must correct at some point as no bull market goes up in a straight line,” Mr Mathias said. “I am very comfortable fundamentally that the factors we see driving the bull market are still in place. We see them as mega-trends we expect to remain in place for many years,” he said, citing examples such as the lack of oil supplies, either from OPEC or non-OPEC suppliers like Russia, to keep pace with demand. “Economic cycles repeat themselves. The bull phase is 15 to 20 years long,” he adds. That may well be the case. It is, however, only human for investors to fret that after such a sharp and dramatic upmove in prices, the commodity party could end with investors suffering an almighty hangover. But if they pick their shots, there should be plenty of mileage yet in the commodity boom story.