Personal Investing
Jonathan Wright 13 Sep 2017 03:32pm

Commodities on the up

Commodities prices are in the spotlight this week for a number of reasons. While oil is nowhere near the $100 a barrel highs seen five years ago it’s crept up over the summer from $46 a barrel in June to $52 today. Tropical Storm Harvey has forced US refineries on the Gulf Coast to shut down, leading to a surge in demand for imported petrol in the US. This means motorists over here are bracing themselves for a 4p a litre rise in petrol prices, making petrol in the UK more expensive than diesel for the first time in more than a year

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Caption: A rise in commodities prices isn’t always a sign of a booming economy.

The price of gold has also been increasing steadily this year as markets pause for breath after an eight and a half year bull-run. Gold’s safe-haven benefits now look especially attractive as North Korea continues to ignore international pressure to abandon its nuclear weapons programme.

Meanwhile copper prices reached a three year high yesterday and nickel touched a two-year high. This is encouraging as copper, with its widespread applications in most sectors of the economy - from homes and factories, to electronics and power generation is often used as a bellwether for the health of the global economy.

Industrial metals have been buoyed by sustained demand growth and restrained supply. As you would expect China is behind these price increases, but this time in more ways than one.

Annual growth in the world’s second-biggest economy picked up to 6.9% in the first six months of the year, as improving global demand boosted Chinese shipments and domestic consumption remains resilient. Manufacturing figures in China released last week showed a jump from the July figure boosting demand for raw materials. However it is really the country’s crackdown on pollution that’s having the most effect on commodity prices.

China has pledged to cut average concentrations of airborne particles known as PM2.5 by more than 15% year on year in 28 northern cities from October to March to meet its smog targets.

Commodities prices are rallying on the news of more environmental checks which could force steel, aluminium and cement plants to cut output by September to tackle winter smog.

As the Communist party prepares to meet for its once-every-five-years congress in October, the government is leaving nothing to chance, with some of the country’s smoggiest cities under pressure to complete annual steel and coal closure targets by the end of September and implement tougher restrictions in the following months.

While it’s commendable that China is addressing its pollution problems, closed factories will ultimately mean less output and productivity that will have a knock-on effect on the wider economy.

From an investment point of view as commodity prices rise it is often the miners that benefit the most. A good example of this is the gold miners. For example if you’re a miner and you’re able to dig gold out of the ground for $1,000 an ounce and the gold price is $1,300 per ounce, you make a profit of $300 an ounce. If the gold price creeps up to $1,400 your profits have increased instantly by a third without doing anything. Of course this works the other way when the price of gold goes down and without a tight rein on costs the gold could be worth more under the ground than above it.

If you’re looking to invest in gold there are two popular routes, you can either invest in gold itself or in gold mining companies. An easy way to gain exposure to the movements of the gold price without having to buy and store the physical metal is through an exchange traded fund otherwise known as an ETF. Like a tracker fund these aim to track the gold price in a cost effective way. These include iShares Physical Gold ETC and EFTS Physical Gold ETC, both available in a Fidelity ISA or pension.

Alternatively another option is to invest in funds that actively invest in gold mining companies such as the Investec Global Gold Fund which features on our Select 50 of preferred funds. This fund is also available in a tax-efficient ISA or pension wrapper.

The current rise in commodities prices could be a sign of a healthy global economy, but scratch beneath the surface and the underlying reasons show a mixed picture, meaning some caution may be required.

Jonathan Wright

Jonathan Wright

Jonathan graduated from Coventry University with a degree in business administration. He joined Fidelity in 1997 and has worked in a number of different operations and marketing roles in the UK and India. He is currently a senior production manager for the Markets and Insights team in Fidelity’s Personal Investing Channel.

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