Investment in commodities

Direct InvestmentrnPhysicalsrnAn investor can buy and sell commodities directly through a commodity broker, or invest in a commodities fund. Dealing in physical commodities is not a practical proposition for most investors because of the minimum quantities that must be traded and the risk of deterioration in quality. The cash market is primarily for users of that raw material/agricultural product, rather than the investor.rnFor non-deteriorating commodities such as metals, however, it is possible and practicle to take a direct holding in the commodity, which will be stored in a London Metal Exchange (LME) approved warehouse. The investor should consider the storage costs, etc. Involved with this option.rnFuturesrnFutures do, however, provide a useful investment vehicle for the purpose of diversifying and hedging.rnAdvantages of direct investmentrnDirect investment offers the following advantages over indirect investment: • Commodity consumers will want to be able to acquire the commodity possibly in advance of needing it if prices are favourable. • There will be lower risks (counterparty risk, political risk). Indirect InvestmentrnShares of commodity companiesrnOne approach to indirect investment would be to acquire shares in a commodity producing company, e.g. mines. As commodity prices rise, we could anticipate that the company’s revenue, and correspondingly, the share price will rise. The extent of this relationship, however, also depends on how the costs may fluctuate.rnAlthough all producers will face the same selling price, they will not all face the same cost pressures and hence, though we may expect share prices to move with the underlying commodity prices, the correlation will not be perfect.rnCommodity fundsrnThe choice for most investors is a sterling commodities fund. Authorised unit trusts are not allowed to invest in commodities; hence, if the investor wishes to have a professionally managed fund, he must look offshore. A variety of funds deal in commodities, differing in their areas of specialisation, permitted levels of gearing and ability to go short. Most funds use both the cash and future markets, hence the fund performance may not exactly correspond to the underlying commodities.rnSuch funds may be generically referred to as Managed Futures Funds (MFF) or Commodity Trading Advisor (CTA) investments.rnThe strength of many managed futures funds lies in their low correlation to the stock and bond markets. These funds are of interest to an investor who is interested in real assets as a hedge against inflation and is also looking more towards capital growth than income.rnIn addition to these more normal funds, exposure may be gained to commodities through certain hedge funds, and through Exchange Traded Commodities (ETCs), a variation of ETFs where a number of competing products have been issued.rnLike ETFs, ETCs are asset-backed open-ended investments that track the performance of the underlying commodity/index. They are traded and settled like shares and have the support of a market maker to ensure liquidity and are available on single commodities (e.g. Gold) or on commodity indices (e.g. energy or precious metals).rnAdvantages of indirect investmentrnThe advantages of indirect investment are as follows: • The shares will probably pay a dividend unlike any direct investment. • Lower holding/storage costs. • Lower minimal dealing size. It is always advisable to seek professional advice from a highly qualified accountant when making Investment decisions. Personally I would recommend this team of highly experienced ACCOUNTANTS IN LONDON