Lord make me a commodity investor, but not just yet.
Commodities rallied strongly in the spring and investors are still piling into them, but the recovery is far from V-shaped.
Investment legend Jim Rogers believes we are in a bull market for commodities that could run until 2022 (that's a precise prediction, shame he didn't say if it would end on a Wednesday or a Thursday).
Commodity prices remain far below the 2008 peak, suggesting there is plenty of upside left. Yet I'm wary of the sector right now. I've been burned before by investing in commodities at the wrong time, and I'm nervous about repeating the mistake.
The cycle slows
Commodity prices enjoyed a thrilling Super-Cycle between March and June, but the pace of growth has slowed since.
In the first six months of this year, copper rose 76%, crude oil rose 57%, sugar rose 49%, nickel rose 48%, and silver and platinum rose around 30%, according to figures from Datastream.
But Invesco chief economist John Greenwood points out that they haven't done so well since June. Most have followed a similar pattern to oil, which rose from $34 per barrel in February to almost $75 in mid-June, but has since fluctuated around the $60-$75 range.
Lucky Jim, unlucky Harvey
I made a brief, wobbly foray into commodities last year, investing in JP Morgan Natural Resources, perhaps the best known fund in this sector.
The fund, managed by Ian Henderson, was on a storming run, soaring nearly 200% in the previous four years. The moment I clicked 'BUY', I had the sinking feeling that I was making the classic mistake of being suckered into a sector just as its boom comes to an end.
And I was. Last autumn's crash wiped out many a good fund, and it certainly wiped out this one, destroying nearly all the growth it enjoyed during the boom. I was lucky to flee when I was just 25% down.
As commodities recover the fund has been flying again lately, and now boasts an impressive 91% growth over the past 12 months.
I failed to jump on board the commodity rally, and now I'm chary about making the leap, in case I'm made a sucker a second time.
Cautious about commodities
The spring commodities rally was driven by several factors. First, Chinese state-owned enterprises aggressively buying up raw materials, which helped to push up the copper price by 75%.
The sector was given a further boost by financial speculators looking for a hard assets to help them offset any fall in the US dollar, and seeking protection against the return of inflation. Some also saw it as a good hedge against currency default.
But this means that the rally wasn't driven by a wider recovery in global trade and economic activity. We're still waiting for that, and until it comes, I think the scope for further commodity price rises could be limited.
And if we suffer a bout of deflation, which is still a possibility, commodity prices could quickly slump.
Shale and hearty
What happens next also depends on the individual commodity. A host of different factors drive the price of diverse resources such as gold, oil, gas, sugar, lithium, uranium and cocoa.
They also behave differently at different points in the economic cycle. Many are non-correlated to equities, none more so than gold. Others change with the weather, notably soft commodities such as sugar and grain.
They are also subject to the laws of supply and demand. Take gas, for example. Prices have plunged 35% this year, thanks to a surge in supply, and US producers developing a cheap way of extracting gas from shale.
With an abundance of gas, there is little profit in pumping up more of the stuff, and many companies have stopped drilling. At some point this will squeeze supply, and price will recover, to the joy of investors who stuck it out.
If you're brave enough, and patient (I suspect I'm deficient in both those virtues), now might be a good time to invest, at the bottom of the cycle rather than much nearer the top.
You can't keep them at home
Investing in a fund is certainly a bit more practical than keeping bushels of wheat in your garage, or a tub of uranium in the fridge.
You can invest in a generalist commodities unit trust, such as JP Morgan Natural Resources or investment trusts such as BlackRock Commodities Income (LSE: BRCI) and World Mining (LSE: BRWM). It has a good track record, so that's what I'll probably do.
You can also track commodities with ETFs and exchange traded commodities (ETCs). These low-cost trackers give you the opportunity to target specific sectors, through funds such as ETFS Agriculture or ETFS Copper, BGi iShares Silver Trust or BGi iShares S&P Global Clean Energy.
I'll be back
You won't be surprised to discover that Jim Rogers has a marginally better investment record than me.
And the sector can certainly tell a good long-term story, with booming giants such as China and India hungry for energy and metals to fund their industrialisation, and agricultural commodities to feed their huge populations.
So why am I hesitating?
Commodities tell us plenty about the wider economy. That's why I'm interested to see how price rises have stalled lately. The bears among you might see this as a sign that the real economy has yet to catch up with this year's (rather unreal) share price recovery.
I would still like access to a commodities fund or two in my portfolio, but I'm going to wait a bit, and buy on any dip. Buying on a dip (provided there is one), is particularly appealing with commodities, given the cyclical nature of their prices.
There is no rush, given that like most investors, I already have plenty of indirect exposure to commodities in my wider portfolio. Although if there is no dip, I could regret my decision, all the way to 2022, when the boom finally ends. Possibly on a Wednesday. Or Thursday.
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