Commodities are increasingly attracting the attention of investors as the price of many of them rose rapidly for the third year in a row. ...

Commodities are increasingly attracting the attention of investors as the price of many of them rose rapidly for the third year in a row. The Goldman Sachs Commodity Index, which tracks 24 raw materials, rose 17 per cent in 2004, the third straight annual gain. Crude oil jumped an impressive 34 per cent last year and copper rose 39 per cent, touching a 15-year high. But the index is heavily skewed towards oil and gas, which together account for nearly 73 per cent of the weightings in the index. Many fund managers are recommending a 3 per cent exposure of investors’ assets in commodities. Very strong demand for raw materials from China is driving the buoyant prices for many commodities, although problems in the Middle East continue to keep oil prices high, which is also keeping the index high. Most institutional and private investors have little or no exposure to commodities, although there is some evidence to suggest this is changing. According to research from Goldman Sachs, the amount of money tracking commodity indexes has risen to around $40 billion, compared with $15 billion in mid-2003. Ninety per cent of this increase came from pension funds. And most analysts believe exposure will increase. “Commodity investment could increase quite a bit, and it looks like it will,” said Steve Mathews, a strategist at Tudor Investment Corp. in the US, at a recent presentation at the Society for the Investigation of Recurring Events, a group of Wall Street analysts who study price patterns. Goldman Sachs believes commodities are an increasingly attractive alternative investment. The investment bank estimated that the returns on the GSCI have averaged about 12 per cent a year since 1970—higher than many of major equity and bond indexes. Strong demand for commodities in China is likely to continue, particularly if the government revalues the Chinese currency, the Renminbi. This would increase the purchasing power of commodities which are mostly priced in dollars. Metal prices have been particularly sensitive to demand in China. Problems in the Middle East are also not about to be resolved soon, which will continue to keep upward pressure on oil prices.