The only things worth buying in the commodities sector right now

published 21 December 2015

151221-gold-mine — There's nothing wrong with investing in commodity-producing companies

It's been a grim year for the resources sector, and it's ending with a bang (not to mention, I suspect, a fair bit of whimpering).

This morning, Brent crude fell below its December 2008 low. Meanwhile, 21 of the 22 constituents in the Bloomberg Commodity Index have fallen in the year to date the worst showing since 2008.

Is there any sign of a turnaround? Or can we expect an equally grim 2016?

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

A bad year for commodities

As for the rest it's a mess. Oil, of course, has collapsed, amid a glut of supply. But it's far from the only casualty: unusually warm weather has hit natural gas prices,decent harvests have hit grain prices, andrising pork production has dented the price of lean hogs'.

Obviously, the first question on any contrarian's mind right now is "when will it be time to buy?"

Scary headlines are often a good sign. And there are some tentative indicators of a bottom: last month, reports the FT, the US futures regulator stopped "publishing data on commodity index investment due to a low level of interest".

The end of the financialisation' of commodities would be no bad thing. Investing in commodities directly as a separate asset class in themselves has never been a sensible idea.

Commodities are not an appreciating asset, they don't generate an income, and they cost money to store. And in the natural course of things, they should become less valuable as technology advances and we all become more efficient and productive.

A long-term bet on commodities is a bet against human ingenuity, and that's so far proved to be a losing bet. (And the day that it isn't, we'll have more important things to worry about, frankly.)

However, there's nothing wrong with investing in commodity-producing companies. Just as with any other cyclical industry such as housebuilding buying at the right time in the cycle can be extremely profitable. And when investors are giving up on a sector, it's often a sign that sentiment can't get much worse.

So is now the right time?

We're not convinced yet. In the latest issue of MoneyWeek magazine, Edward Chancellor talks to Merryn Somerset Webb about why he thinks we're not quite there yet for most areas of the mining sector except for gold mines, which are very much there. (You can watch the interviewhere.)

However, just because it's not time to dive in wholesale, doesn't mean you can't find worthwhile investments out there. My colleague Alex Williams digs into the mining sector to see which stocks are standing out as survivors from the fallout and looks at why now could be the right time to buy them.

(If you're not already a subscriber, I suspect these ideas alone could make it very worth your while getting off the fence now sign up today and you can read them online).

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.