COMMENT
Hot Commodity Trackers

The price of commodities is one of the most hotly discussed topics at the moment. Hardly a day seems to go by without builders moaning about the high cost of steel or consumers complaining about oil and gas prices. But how can investors hedge against rising commodity prices?

According to Graham Tuckwell, who brought Oil Securities (LSE: OILB) to the stock market last week, investors can now take a low-risk punt on the oil market instead of just grousing about it. Through the oil tracker, investors can access the oil market without having to take physical delivery of a barrel of oil. Each oil share is bought at the market price for a barrel of oil and matched against a physical oil contract. Apart from oil, investors can also track the gold market through Gold Bullion Securities (LSE: GBS), which was also brought to market by Tuckwell.

The recent interest in commodities is a reflection of the serious mismatch between the supply and demand of key industrial raw materials. Quite simply, when supplies and inventories are plentiful commodity prices will be low, and of little interest to speculators. But when supplies are depleted, and demand is high, prices have to rise, and speculators will take note.

One person who is unlikely to be surprised by the growing interest in commodities is Jim Rogers. He believes that commodity prices run in cycles, each lasting around 17 years. He reckons that the current bull-run in commodities started back in 1999, and could be poised to run last for another decade.

He started a fund called Rogers International Commodities Index Fund just before the beginning of the bull-run in July 1998. The fund tracks the performance of his self-compiled basket of commodities. Since July 1998, the Rogers' Commodities fund had risen by 176% at the end of December 2004. So far this year however, it has risen just 6%.

Mind you, the monthly performance of Rogers' fund can be quite patchy. November 1998 and September 2001 were particularly poor months, when the fund dipped 10% and 9% respectively.

For me, this highlights one of the main dangers of speculating in commodities. That's because traditionally, the main way to access commodities was through future contracts, which can be quite risky. But with the introduction of exchange traded funds, there are better routes for investors to hedge against commodities without getting their fingers badly burnt. What we now need are even more commodity trackers!