Commodities Index

'Commodities' refers to real stuff traded in futures markets for delivery at a time in the future.
There are about 150 commodities traded. Generally these are categorised as 'hard', ' soft', and
'currency'. An example of hard commodities is gold. An example of soft commodities is grain.

The well respected Goldman Sachs Commodities index tracks the major commodities in the chart
below:

Remember the unrest in Burma late 2006 early 2007? That was not religious or political, as many
thought. It was the cost of rice that caused Burmese to take to the streets. Well, the booming soft
commodities are back again, at previous highs.

Agricultural and energy prices remain at elevated levels. This mounts a threat of inflation in
emerging economies where policy makers are already moving to control price rises.

What does this mean for investment? I can see a couple of themes that might be relevant:

 Emerging economies will have to paddle hard to prevent social unrest, although an
opportunity exist to increase the standard of living as higher prices are paid to agrarian
subsistence communities. Social unrest disrupts investment markets, while increased living
standards does the reverse filtering through to consumption spending. Good government is
key;
 In the 90's China exported deflation in goods to the developed world. The manufacturing
deflation mega cycle through the 90's is probably reversing. So goods exported from
emerging economies like India and China will now have to increase. Manufacturing in
 developed economies will be more competitive but the consumer in those economies will
buy less goods. Retailers will experience a hit with higher food inflation;
 Real assets such as property and infrastructure in emerging economies should perform well
if inflation breaks out;
 Volatility in emerging market shares will substantially increase. The incredible flood of
capital that is flowing into these investment markets will be tested through increasing
corrections;
 Unpegging currencies from the US$ (China and South Korea) is going to become a stronger
incentive to reduce the imbalance. Holding emerging market shares in unhedged positions
is going to be rewarded for Aust investors in such a scenario;
 Demand for global commodities is on the rise and this seems structural. Buying commodity
and related producers to benefit;
 Demand for high-end brands is likely to be a long term benefit as emerging economies make
more money and consume more goods and services;
 Conventional investment such as following an index is not adequate as the large
capitalisation bias is likely to break down compared to the 80s and 90s;

Interesting times ahead. Industrialising emerging economies will only go one way, and we will
all have to cope with that reverberation.

GV