Patience – the rarest of all commodities!


The natural resources story is a simple one; supply of oil, gold and other sought after commodities is finite, whilst the global population is rising and living to an older age, thus creating higher demand over time. We believe that this points to an upward curve in prices over the long term; however, in the short term prices will be volatile and we recognise this fact, having an investment process in place for the recommendation of such investments;

  • We categorise these investments as the highest risk component of a portfolio.
  • An individual’s allocation to this sector of the market will depend upon their appetite for risk and timeframe; a conservative investor would likely have no exposure to this sector, and as we move up the risk spectrum, and extend the period for investment, the exposure increases gradually.


These markets have endured a very difficult period of late with the heavy fall in oil prices in particular affecting these markets;

  • Demand is lower than it has been as a result of weaker economic activity, particularly in emerging markets such as China.
  • Increased efficiency and a switch from oil to other fuels, including renewable energy with many countries having targets on such a move has also impacted upon demand.
  • The turmoil in both Iraq and Libya has not yet affected their oil output.
  • Gold and silver are out of favour as equity markets continue to move upwards.
  • Most of these commodities are priced in dollars, and with the dollar strengthening against other currencies this is somewhat protecting the return for non-US investors.
  • America has become the world’s largest oil producer, and whilst they do not export this has created a lot of spare supply.


Saudi Arabia, which produces a third of global oil supplies, could curb their production of oil to reduce the supply, increase relative demand and send the price upwards again; however, they do not need to undertake such measures. Their oil costs far less to get out of the ground and with reserves approaching one trillion dollars they can easily afford to maintain the current high production levels and suppress the price. In turn this will harm the fortunes of, in particular American shale gas companies many of whom are, perhaps unsurprisingly, heavily damaged.

The Organisation of the Petroleum Exporting Countries (OPEC) has recently announced an emergency meeting for early next year which will hopefully see an agreement reached on future production levels to help restore the price of oil which should, in turn, see prices rise again. We do still believe that resources will generate strong returns in the future but at this moment in time economic circumstances are not conducive to growth.

Calling the bottom of the market is a thankless task, and one which many specialist fund managers have called incorrectly in recent times. Some commodity-themed funds have been hit harder than others; some have managed to limit the damage whilst others have suffered volatility as a result of a higher risk approach.

Our view is simply this; this is a high risk area of the market, and when sentiment towards commodities changes for the better, we want our clients to benefit fully from the upturn. We do not believe that recommending a more conservative approach for this aspect of a portfolio is appropriate, and as part of a diversified portfolio we believe that a high risk approach for a small proportion of this wealth could produce better returns in the long run.

Looking forward into 2015 we anticipate the resources markets could be sedate. The fund managers we have listened to anticipate strong returns from some areas of the market but until the supply and demand issues are resolved, a short term recovery might not be forthcoming. Nonetheless, we retain our belief in this sector as a long term growth play. When sentiment, economic and political conditions become more conducive to growth in these markets we anticipate a fast and significant upturn.

Richard Haines
Investment Manager
01633 653 171