Worth a Punt in Gold or Commodities?

Commodities as a whole have been in a hole for more than a decade.  And gold is at one of those (bargain basement?) levels again where a sharp rise would not be out of character.  Worth a punt? Can we repeat the huge profits of 2016?

 

This week we noticed that the commodity sector within the US stock market is at its lowest level versus the wider market since 1970.  Even over the last 10 years the US market is up 115% whereas commodity stocks are down 62%.

 

When such extremes occur they are a decent prompt to review an area which we might otherwise ignore.  We explored similar research in February, “Commodity Fund attractions”, though these funds have continued slipping away since then.

 

The granddaddy of funds invested into the shares of commodity companies is JPM Natural Resources, which is no higher now than it was in 2004.  If commodity companies are worth buying just now one lingering concern is the oil price.  Using some straightforward technical analysis, it appears to have somewhat more downside, so we would favour a fund with a bit less in oil companies.

 

The JPM fund has 37% in oils, whereas First State Global Resources has only 23%, so it would be a preferred fund.

Those who are really brave, and comfortable with buying individual stocks, could go for Rio Tinto shares – a surrogate for the sector ex oil.

 

What about gold?  We had a fantastic 2016 with our gold fund reco, up in excess of 140% in a little more than 6 months.  If only it was always this easy and this profitable!  Trigger took an enthusiastic leap into the Smith and Williamson Gold fund again in December 2016, and the price went quickly from 60p to 73p (up 21%), and equally quickly went lower – now sitting around 57p.

 

Sentiment towards gold is again plumbing levels which in the past have represented decent buying opportunities – see the previous Trigger blog for more detail on why we focus on this angle.  

 

Again we would expect the gold mining shares to go up more than the gold price.

 

What is neat is the position for a stop-loss.  If the price of the S&W fund falls below 55p, sell – no guarantee here, but it shouldn’t be below this level if a bounce is now underway, albeit in it’s very early days.