Thinking Real ...
Ooops – we’re doing it again.
By Guy Isherwood
FOR OVER A DECADE we have been raving about the ing. Yet still they came, especially the momentum-
wonderful world of commodities. Not just for invest- chasing investors, and particularly those looking for
ment purposes but for the people, capital, commit- portfolio diversification.
ment and intellect devoted to this markeplace. As a consequence, prices for many commodities,
When we first published Commodities Now back in notably food and energy, have risen strongly, con-
1997, the bear market in commodities was starting to tributingtostrainsintheglobaleconomyandsignsof
come to an end. As the new millennium approached, political discontent. At the same time, financial mar-
commodities were still very much the poor relation to kets for commodities have grown rapidly.
activity and investor interest in traditional capital and Do commodities deserve a position in a balanced
money market products. portfolio with the aim of improving the risk return
Back then, commodities were very much a niche trade-off? The theory suggests so, but more funda-
market – almost a club – where individuals, particular- mental changes have taken place, particularly in the
ly producers and their intermediaries, were the only energy complex which could render past behaviour
people who knew the rules of the game. Given the redundant. And if you do include commodities in your
volatility in many sectors, commodity investments portfolio, in what format and what proportion? Many
were for ‘experts’ or those with money to lose. choose the passive index route which we investigate
As the bear market in commodities came to a close, later in this supplement (see page 42).
‘financial experts’ slowly began taking greater notice Most commodities are now playing by different
of commodity plays. The emergence of Enron as a rules. Greater independence from the US dollar is
commoditypowerhousecertainlyhelpedthatprocess. allowing individual fundamentals of each commodity
Meanwhile, new product categories were being added to guide price behaviour. Hence, not only have we
to the commodities complex. Deregulation and glob- seen unique trends across commodity segments but
alisation took hold. The emergence of the BRIC also within the segments themselves.
economiesadvanced.Emissionslegislationwasenact-
ed.Eventheweatherstartedtoberecognisedasakey
Most commodities are now playing
factor in managing risk and stabilising earnings
by different rules
volatility. Commoditisation advanced.
New markets (exchanges) developed for the transfer In the pages that follow, we have asked a number of
of risk between producers and consumers. That specialists from the commodity complex to give us
process continues as exchange consolidation pro- their views on the structure and potential for these
gresses and new markets develop, particularly in Asia marketsgoingforward.Insodoing,wenotethatcom-
and the Middle East. Existing exchanges have modity resources on the whole are finite and their
increased and extended commodity product offerings depletion needs to be managed in a sustainable way,
as market players have demanded more innovative because as the world’s population grows and urbani-
risk management tools. Computing power has contin- sation increases, demand for these ‘things’ will con-
ueditsinexorableriseprovidingthemeanswithwhich tinue to expand proportionately.
to manage ever more complex transactions, trading But the critical question remains; Has the com-
strategies and book sizes. modities boom come to an end? That depends very
Slowly but surely, the promise of a more efficient much on the commodity in question. The long-term
commoditymarketplacehasemerged.Tradinghouses arguments for some – particularly energy – remain
and exchanges continue to find new and innovative solid. Newer markets, such as those for renewables
ways of getting access to inventory and prices. and emissions, combined with the relevant invest-
Trading systems have developed further, together ment vehicles, are destined to develop further and
with documentation, clearing and other services, should not be overlooked. That is why commodities
which have also spurred on trading volumes. are relevant to us all, regardless of our investment
As a consequence, commodities have attracted bil- intentions
•
lions of dollars of investments since the millennium.
The smart money got there first, but much of it
Guy Isherwood, Editor, Commodities Now
cashed-inveryearlygiventheprecedentforprofittak-
www.commodities-now.com
COMMODITIES NOW SEPTEMBER 2008 31
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