Question
I’ve read several articles recently suggesting that commodities have become overpriced and might even be the next bubble waiting to burst. Others, though, think that China’s appetite for raw materials is such that they’ll be in demand for some time.
A few years back I invested a small sum in JPM Natural Resources. This has since grown to the point where it now represents 7% of my portfolio. I’m wondering whether I should sell half of it and add the proceeds to one of my income funds (charges aren’t too much of an issue as I bought the fund through a discount broker and it’s in a funds supermarket, but I’d still lose 0.25%).
On balance I’m reluctant to sell as I believe there’s hope of yet more growth and I’m not likely to need the money within the next 5 years or so. What’s your own view?
Answer
Personally I’m a fan of commodities for long term investing. A reasonable chunk of my pension fund is exposed to commodities – this might seem high risk and unbalanced but given I’ve probably got 20+ years until retirement I’m comfortable with this.
My rationale is very simple. As far as we know commodities, both hard and soft, are in finite supply. Provided the world’s economies continue to develop and its population continues growing (growth rate is still positive although slowing) then demand for most commodities is likely to increase and if supply can’t keep pace then prices should rise.
To give a simple example: the average person in China currently consumes about two barrels of oil a year while in India it’s one barrel. Contrast this to the US where the average is 25 barrels per person (admittedly an extreme example) and it’s obvious that demand could, over time, grow significantly. Indeed, China’s demand for oil in January 2010 was 28% higher than the previous January according to the International Energy Agency.
I don’t doubt there’ll be a lot of volatility along the way, but 10-20 years should be sufficient to ride this out.
The JPM Natural Resources fund is primarily exposed to energy, gold and other metals. Although the gold price is arguably high at present it may well hold up over the next five years if global economic uncertainty continues as it’s a popular safe haven (although supply did outstrip demand last year according to World Gold Council figures – largely due to a fall in jewellery demand). And if emerging markets continue to prosper then gold, energy and metals should all benefit. However, commodity prices tend to be rather volatile, in part due to speculative investors affecting prices, so they’re by no means a one way bet – especially over five years.
If you’re comfortable with the risk then by all means maintain your exposure. But bear in mind you might also have a reasonably high exposure to the energy sector via other investments you own (it currently accounts for about a fifth of the FTSE 100 Index). If risk is a concern then your idea to sell half and re-invest in a lower risk income fund sounds sensible.
Good luck whatever you decide.
I’ve read several articles recently suggesting that commodities have become overpriced and might even be the next bubble waiting to burst. Others, though, think that China’s appetite for raw materials is such that they’ll be in demand for some time.
A few years back I invested a small sum in JPM Natural Resources. This has since grown to the point where it now represents 7% of my portfolio. I’m wondering whether I should sell half of it and add the proceeds to one of my income funds (charges aren’t too much of an issue as I bought the fund through a discount broker and it’s in a funds supermarket, but I’d still lose 0.25%).
On balance I’m reluctant to sell as I believe there’s hope of yet more growth and I’m not likely to need the money within the next 5 years or so. What’s your own view?
Answer
Personally I’m a fan of commodities for long term investing. A reasonable chunk of my pension fund is exposed to commodities – this might seem high risk and unbalanced but given I’ve probably got 20+ years until retirement I’m comfortable with this.
My rationale is very simple. As far as we know commodities, both hard and soft, are in finite supply. Provided the world’s economies continue to develop and its population continues growing (growth rate is still positive although slowing) then demand for most commodities is likely to increase and if supply can’t keep pace then prices should rise.
To give a simple example: the average person in China currently consumes about two barrels of oil a year while in India it’s one barrel. Contrast this to the US where the average is 25 barrels per person (admittedly an extreme example) and it’s obvious that demand could, over time, grow significantly. Indeed, China’s demand for oil in January 2010 was 28% higher than the previous January according to the International Energy Agency.
I don’t doubt there’ll be a lot of volatility along the way, but 10-20 years should be sufficient to ride this out.
The JPM Natural Resources fund is primarily exposed to energy, gold and other metals. Although the gold price is arguably high at present it may well hold up over the next five years if global economic uncertainty continues as it’s a popular safe haven (although supply did outstrip demand last year according to World Gold Council figures – largely due to a fall in jewellery demand). And if emerging markets continue to prosper then gold, energy and metals should all benefit. However, commodity prices tend to be rather volatile, in part due to speculative investors affecting prices, so they’re by no means a one way bet – especially over five years.
If you’re comfortable with the risk then by all means maintain your exposure. But bear in mind you might also have a reasonably high exposure to the energy sector via other investments you own (it currently accounts for about a fifth of the FTSE 100 Index). If risk is a concern then your idea to sell half and re-invest in a lower risk income fund sounds sensible.
Good luck whatever you decide.
Read this Q and A at http://www.candidmoney.com/questions/question194.aspx
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