What are commodities? Commodities are products such as oil, natural gas, gold, platinum, copper, wheat, sugar, coffee, rice, live cattle, pork bellies etc. They are traded on exchanges, similar to shares, but few retail investors take an interest in them. This is likely to change. Renowned investor, Jim Rogers, author of 'Hot Commodities', makes a strong case for commodities as an asset class.

He argues that demand for commodities is set to grow as the population of the world increases from six billion to nine billion by 2050.

A larger population means greater demand for food supplies and other commodities. However, food suppliers will struggle to meet this demand, as the amount of arable land available to produce food declines due to the diversion of land to produce bio-fuels and the effects of climate warming i.e. increased incidence of drought and the flooding of low lying areas.

Furthermore, the current policy of quantitative easing (i.e. printing money) employed by the United States and a number of other governments will tend to push up commodity prices, as more money chases a limited supply of commodities. Although, central banks can print money, they cannot create new raw materials or foodstuffs out of thin air.

The twentieth century’s longest bull market in commodities began during the Great Depression in 1933. It is worth noting that during the 1930s, most economies went through tough times, yet commodity prices kept rising.

Investors should also note that commodities give greater balance to a portfolio, as they tend to appreciate strongly during periods where stocks and bonds under-perform. It could be argued that, if you are not investing in commodities, you are not genuinely diversified.

Commodity cycles normally last 15 years or more. The current up cycle started in 1998 but commodity prices, particularly agricultural commodities, are still significantly below 1980 levels while energy and metals related commodity prices are well below 1980 (inflation adjusted) levels.

So the supply/demand fundamentals support higher prices but what does the stock market tell us? The market is rarely wrong and it confirms that commodities are a growth area, as commodity shares have outperformed the general market over the last four years.

How can one invest in commodities? The simplest way to invest in commodities is through exchange-traded funds (ETFs), which either invest in a basket of commodities or in a particular commodity. Alternatively, one can invest in an ETF, which invests in the shares of commodity companies.

A recent Yale study ‘Facts and Fantasies about Commodity Futures' found that over the last 60 years returns from investing directly in commodities outperformed the returns from holding shares in commodities companies. If you believe the commodity story, research favours investing in the commodities themselves but either investment approach should show good returns. There will be bumps and setbacks along the way but the trend is up.

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