It is unusual, when reviewing the financial markets, for a fortnight to make a great deal of difference; long-term trends, once established, tend to continue until they end which usually takes years. This highlights one of the problems of writing a fortnightly newsletter.
Commodity markets are driven by some very strong underlying fundamentals. The bull market, that is now well established, is best explained by using the words of Jim Rogers, ex-partner of George Soros.
Global hard landing: investing in raw materials
"Commodity price booms are typically the produce of years of under investment Meanwhile, demand creeps up almost unnoticed until imbalances suddenly erupt and prices surge. Producers can't respond quickly because of the long lead time required to finance and build capacity. The bull market will end in a crescendo of hysteria. The public will feel an overwhelming desire to invest in raw materials rather than stocks and bonds."
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A succinct description which leads us only to ask, are the public yet feeling an overwhelming desire to invest in raw materials? It is quite clear that is not the case and so, it is reasonable to presume that this bull market for raw materials, including energy, has lots in it yet.
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If, as we expect, a hard landing for the global economy is on the cards, then, for a period of time, demand will abate and a significant correction might take place. Subsequently, once demand starts to increase again and in particular, the economies of Chindia further develop, then the commodity bull market will resume and finish up much higher than at present anybody thinks possible.
Global hard landing: buy gold mining shares and energy
RHAM managed portfolios remain invested in gold mining shares (Merrill Lynch Gold & General and Investec Global Gold Fund) and energy (Merrill Lynch World Energy Fund, Investec Global Energy Fund and the Merrill Lynch New Energy Fund).
The bull market for gold bullion is not likely to be affected by a hard landing of the global economy; in fact, we envisage, whatever happens, that there will be continuing good reasons for gold bullion to go higher and gold mining shares to become more valuable. At the time of writing, gold is holding above $600/oz and it would appear to be in no particular danger. It is, in our view however, only a matter of time before new highs are made and gold moves steadily towards our next target of $1,000/oz. The two funds we have selected to access these investments should prosper mightily from such progress.
Energy is a horse of slightly different colour. Of course, demand will be adversely affected in the event of a global economic slowdown. At present, however, the bull market is well established, the hurricane season has only just started and parts of the Near and Middle East is typically in varying states of precariousness. Supply disruption seems quite likely to be added to the continued demand. We will watch carefully as the year moves on because the current good reasons for continuing to hold these investments might change.
If we had to go to sleep for five to ten years and choose today which investments we would wish to hold during that period, these types of commodity investments would be high on our list.
By John Robson & Andrew Selsby at RH Asset Management Limited, as published in the Onassis Newsletter, a fortnightly newsletter that gives insight into the investment markets.
For more from RHAM, visit https://www.rhasset.co.uk/
Recommended further reading:
Visit our section on investing in gold for a full list of articles, including: Merryn Somerset-Webb on why you'll regret it if you don't buy gold; and Paul van Eeden on what a dollar slump will mean for gold. And click on the link below for more on how to make money from gold...
