Having said that, I believe they are currently providing the best entry prices for adventurous investors who can stomach this short-term volatility. Most commodities are at three-year lows and have already priced in most of the negative press surrounding future prices.
The question is then: which ones should investors pick and why?
Near enough every commodity sector is down at present so the easy answer is to buy a spread of them to diversify your risk.
Precious metals such as gold, silver and platinum have fallen significantly and are seen as an alternative to currency, so they are likely to be the popular choice for most investors.
Performance of indices over 1yr
Source: FE Analytics
The prime reason for the drop has been down to traders bidding down prices through derivative markets.
It should be noted there are less fundamental value factors driving returns in this market, making it more speculative, due to the number of big banks and hedge funds involved.
Although this adds a degree of unquantifiable risk, it is clear prices have fallen so low that once trade volume reverses, precious metals are prime for a strong recovery.
For those investors looking for a way to tap into this theme, the BlackRock Gold & General fund is good choice.
Fund manager Evy Hambro has only had two negative years out of the 12 he has managed this fund, making it a good option for those seeking a more stable way to get involved in this asset class.
Given what you see in the graph below, I think the fund is trading at a very good entry price at the minute.
Performance of fund vs indices over 3yrs
Source: FE Analytics
Energy markets are also a good buy right now – namely natural gas prices, which are currently trading close to all-time low levels.
Crude oil can also rise sharply, as we experienced in 2008, and given that entry prices are trading at relatively low levels it is worth picking up some exposure.
The JPM Natural Resources fund is one with a wider mandate than BlackRock, including energy stocks in its investment universe. It therefore gives investors a wider blend of commodities exposure than its rival.
It has an excellent long-term record, but like all commodities funds, has had a tough time of late. For the longer-term investor, it could currently be at a good entry level.
Performance of fund vs indices over 3yrs
Source: FE Analytics
For those who focus more on fundamentals, agricultural commodities have some very interesting trends going on at present.
Wheat and sugar, for example, are trading at very good entry-level prices. The latter is trading at a three-year low on the back of increased supplies in Brazil – the biggest producer of the crop.
Research shows that due to increased quotas and tax reliefs, bio-ethanol demand has recently increased, which should swallow up a lot of this supply.
Further to this, India – the biggest worldwide consumer of sugar – has decreased its production levels in favour of growing other commodities, meaning that global supply should decrease.
Projected supplies may have been over-stated therefore, making the current entry price seem artificially low.
Wheat has also priced in a bumper crop and fallen to year-low levels as a result.
If the reverse happens and adverse weather conditions hit the US in the coming harvest month, we could see a hike in prices, as experienced last year.
Funds such as CF Eclectica Agriculture – one that I rate highly – do capture a lot of the trends mentioned above.
George Lee’s fund uses the MSCI World as its benchmark, which it has underperformed in recent times.
Performance of fund vs index since launch
Source: FE Analytics
Another way to take advantage of commodities is through the ETF market, where specific listed vehicles have been designed to track the price of certain natural resources.
This method may be preferred by those seeking a more focused, cost-effective investment.
It allows investors to get direct exposure to natural gas, gold or sugar, for an annual charge of as little as 0.1 per cent.
Investors can also buy short ETFs profiting from commodity falls and levered ETFs benefiting from enhanced returns on the upside.
Given the current state of the market, where near enough all commodities are down, a more diversified commodities ETF, such as the one charted on the graph below, may be a worthwhile option.
Performance of ETF vs index over 5yrs
Source: FE Analytics
ETF Securities All Commodities has an ongoing charges figure (OCF) of 0.49 per cent.
The commodities space has certainly taken a beating over the past year and month.
The sector is not without risk of course, but the likelihood of this poor performance continuing is doubtful, as the arguments for the upside are now outweighing the down.
Harpreet Sajjan is head of portfolio management at Platinum Financial Services. The views expressed here are his own.