How to harvest gains from agriculture, energy and gold

by Emma Wall

Commodity shares are likely to have caught the attention of contrarian investors. Despite positive developments – including gas discoveries in the US, renewed consumption in China and a gold price bounce – many resources-related stocks and funds fared poorly last year.

We explain how to get exposure to gold, mining and energy.

Energy

Pau Morilla-Giner, commodities specialist at asset manager London & Capital, said the main beneficiaries of the shale gas discoveries in the US would be the water and waste industries.

"Companies involved either through water supply, sale of water chemicals, fracking pumps or associated wellhead infrastructure should see much more business," he said. "Companies involved in regulation or testing should also see benefits as regulation increases and standards tighten. Companies involved with safe disposal of hazardous waste are already seeing some activity through treatment and disposal of the highly contaminated byproducts from shale production. This demand looks sets to increase as regulation on the disposal of fracking fluids becomes much stricter."

He tipped Ecosphere Technologies, a water recycling company; Intertek, an international group of testing laboratories; and Altela, a water treatment desalination company.

Gold

Wealth manager Brian Dennehy of FundExpert.co.uk this week urged investors to sell gold bullion and buy gold mining shares. "Gold is neither a safe haven nor an inflation hedge," he said. "But central bank largesse could trigger a significant bounce in gold mining shares.

"Before Christmas, when the US Federal Reserve announced continuing massive money printing, gold should have soared – but it didn't. But that same central bank largesse could trigger a significant bounce in the shares of gold mining companies in 2013. The large deflationary waves, from demographics and huge debt piles that governments refuse to tackle, could keep a lid on the gold bullion price for some time."

He tipped the BlackRock Gold & General and Smith & Williamson Global Gold & Resources funds.

The price of physical gold bounced this week on news that Germany's central bank was repatriating bullion reserves from New York and Paris. Experts are divided on whether the gold rally has run its course, with BlackRock's Evy Hambro saying that it will peak this summer at $2,400 an ounce. The price closed in London at $1,675 on Thursday.

Exchange-traded funds are increasingly the most popular method of gold investment. They are available for gold, silver, platinum and palladium. ETFs can be traded throughout the day – all you pay is the dealing charge of around £7 per trade.

Mining

Mining stocks are historically very volatile. Following the news earlier this month that the US had avoided the "fiscal cliff" of tax rises and spending cuts, mining stocks registered the greatest rise in the FTSE 100 – but then the greatest fall when the index corrected itself.

It is such fluctuation that causes Hargreaves Lansdown's Mark Dampier to advocate buying a fund with exposure to the sector. "In a 'risk-on' environment, the top performers are commodities, but equally when there is bad news they are often the first to fall," he said. "Many UK managers have a hefty chunk of their funds in the mining sector. Nigel Thomas's Axa Framlington UK Select Opportunities fund and Tom Dobell's M & G Recovery are both good ways to play the story."

For speculative investors, Mr Dampier said Russia was an option. Energy makes up about 60pc of the Russian stock market. "Russia is very cheap and making lots of money from oil – at some stage this has to filter through to investment funds," he said. He tipped JP Morgan Russian investment trust or the Neptune Russia unit trust.

Soft commodities

Soft commodities such as cocoa, agricultural products and timber can provide a useful diversifier in a portfolio. The returns have been pretty good too – the Sarasin AgriSar fund has risen by 12pc over the past year, for example.

Investors need to do their homework when investing in agriculture, as one fund can differ greatly from the next. Sarasin's AgriSar fund invests in the entire supply chain, from grain to supermarkets. This means that, although you may miss out on large upsurges, there will be much smoother growth. Eclectica Agriculture invests only in the "inputs", such as corn, grain and fertiliser, and this makes for a volatile fund. It has returned 4.3pc over the past year.

Investing in soft commodities can have tax benefits too – as long as the timber you own is regularly felled and operated as a working piece of woodland it is exempt from inheritance tax and capital gains tax.

Original Article Here

Gold slips in Europe

Gold was on track for its biggest one-day fall in a fortnight on Thursday after the Federal Reserve disappointed hopes for more aggressive monetary stimulus, lifting the dollar and bringing forward expectations for a rise in US interest rates. 

After a policy meeting ended on Wednesday, the Fed said it would extend an existing programme aimed at bringing down long-term borrowing costs and stimulating growth, dubbed Operation Twist, but did not announce a new round of quantitative easing, which some investors had hoped for. 

Traders said the decision not to embark on a new programme means the Fed is likely to start raising rates earlier than its own guidance suggests. Spot gold was down 1.5 percent at $1,582.09 an ounce at 1405 GMT, while US gold futures for August delivery were down $33.00 an ounce at $1,582.80. "Currently we're seeing a bit of follow-through from disappointed investors but believe we should be finding support pretty soon," Saxo Bank vice president Ole Hansen said. 

"Commodities, especially energy, are not having a good time, with the GSCI (index) approaching bear market territory. This is pulling the whole sector lower at the moment as redemption and general nervousness about the near-term prospect is causing some selling, but gold and agriculture stand out, I would say." Gold had risen as high as $1,640.50 an ounce earlier this month on hopes the Fed would unveil fresh quantitative easing measures to stimulate growth after a spate of disappointing economic data. 

That would have maintained pressure on long-term interest rates, keeping the opportunity cost of holding gold at rock bottom, and may have pressured the dollar. Prices started to correct even ahead of the Fed statement as speculation grew that full QE was off the table, but more selling was seen on Thursday. 

"We are wary of the potential impact of the looming 'fiscal cliff' in December, when the latest roll-over Bush-era tax credits are due to end could see consumer purchasing power fall substantially," investment bank Fairfax said in a note. "We expect the Fed to take further action before this event to avert yet another potential crisis." "We see gold as attractively priced at these levels, and we see the potential for further QE in the United States, China and Europe as leading gold higher this year." 

From a technical perspective, analysts who study past price moves for clues on the future direction of trade see solid support for prices around $1,580/1,560. Further consolidation around current levels is expected. Physical gold traders in India, the world's biggest consumer of the metal, kept to the sidelines despite its price fall, seeking a bigger retreat in spot prices. The rupee's fall to a record low against the dollar kept local prices high. 

Silver was down 2.2 percent at $27.48 an ounce. The gold/silver ratio, which measures the number of silver ounces needed to buy an ounce of gold, rose above 57 on Thursday, moving back towards the year's high, as the grey metal underperformed. Spot platinum was down 0.2 percent at $1,447.75 an ounce and spot palladium was down 0.7 percent at $610.75 an ounce. 

Monthly Swiss imports of raw and powdered platinum from South Africa, source of nearly four out of five ounces of world supply of the white metal, fell to their lowest in more than two years in May, Swiss customs data showed on Thursday. "We saw in today's South Africa trade balance that platinum exports from SA were low in Q1," Standard Bank analyst Walter de Wet said. "This should have spilled over into April and May." 

Copyright Reuters, 2012