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Money Talk: Every cloud has a silver - make that gold - lining

By Raymond Mulligan

Published 01/10/2007

Question: With all the turbulence in the stock market and problems in the banks where else should I consider investing?

Answer: As the traditional assets for investing, namely property, cash, equities and gilts, have recently experienced various issues and volatility, attention will always turn to other investments as a way to achieve growth with minimal volatility.

Many investors are turning to one of the world's most exciting growth stories, ie, the boom in commodities such as gold and oil.

The recent surge in oil prices (all too familiar for those of us who heat our homes with the stuff) has now seen the price of oil hit $$84 a barrel, with many investment commentators thinking it could go as high as $$100 in the near future (so if nothing else you should be topping up your tank).

A number of factors have been driving the surge, including the current state of the dollar, concerns over a storm that could hit production in the US Gulf Coast plus worries over pre-winter demand in the northern hemisphere.

Gold is another commodity which has been experiencing a steady rise, and last week hit its highest level for nearly 28 years at $$730 an ounce.

Again it is expected to continue to rise in price to at least its nominal peak of $$850 an ounce. It last traded at this level in 1980 when stock markets were at the height of an inflationary scare.

Elsewhere other commodities such as wheat have also seen dramatic rises. Wheat prices have surged, breaking through the ceiling of $$9 a bushel for the first time.

The price rise here has again been caused by a number of factors. Firstly, prices have been driven higher because of droughts in key production areas like Australia.

A lower supply has also been countered with a rise in demand from new markets such as India and China.

Finally, an increase in the production of biofuels, which are made from crops such as wheat, have also caused a shortage in the traditional supply chain. All of this has culminated in a sharp increase in prices which have seen the price of wheat double in value since April this year.

So with the backdrop of rising markets in the various commodities and, as mentioned earlier, the turbulence experienced recently in the traditional asset classes, it is little wonder that these are producing some opportunities for the investor.

Many of the commodities can be accessed via investment trusts. These vehicles pool your cash to invest in shares, but are unlike unit trusts in that they are companies in their own right.

As such they can trade directly on the stock market. They also have the added advantage of sometimes trading at a discount. This will often happen at times of turbulence in the stock markets.

This means that the assets valued in the company are higher than the share price of the investment trust.

For example, the assets per share held by the investment trust could be valued at £1, but the investment trust costs 90p to purchase. In effect an investor receives £1 worth of assets at a discounted price of 90p.

As well as buying commodities via an investment trust, they can be purchased through a vehicle known as Exchange Traded Funds (ETFs).

ETFs have been around for a long time but have only recently started to gain widespread acceptance among retail investors.

In essence they are an investment which track the performance of a specific stock, index or other benchmark, eg, the price of gold.

Of course, as with any well diversified portfolio, you should be asking your adviser to incorporate commodities to some extent within its overall mix.

Raymond Mulligan is managing director of Johnston Campbell, a company of independent financial advisers regulated by the Financial Services Authority.

Belfast Telegraph

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