What next for commodities?

The price of gold fell by nearly $100 at the start of 2011 causing some to speculate over its future and that of commodities in general. Nick Raynor, investment adviser at The Share Centre, explains why investors should still consider exposure to this sector and which stocks to consider. 

"There are several factors that could account for the recent slump in the price of gold. Firstly, talk of interest rates rising in the US could have led to investors feeling more confident of reasonable return from potentially less risky investment. Secondly, the start of the year is traditionally the time for investors to evaluate and re-focus their portfolio.

"Fortunately, this weakness is not true for the whole of the commodity sector. The price of tin recently reached close to $30,000 per tonne as adverse weather conditions in Indonesia led to possible export restrictions and the same can be said for the floods in Australia affecting the price of coal. Palladium continues to hit new highs and platinum is also showing strength.

"We are also positive that gold will recover and reach a target price of $1500 this year. It is still in favour with Asian states and the Central Banks are still buying for their reserves. Russia recently announced they plan to purchase 100m tonnes in 2011. We are also seeing the Peoples Bank of China increasing reserves.

"Investors seeking exposure to gold should take a closer look at Medusa Mining and for exposure to gold and silver we recommend Fresnillo.  Those wanting a more rounded approach to investing in commodities should take a closer look at both Rio Tinto and BHP Billiton. Both companies have strong balance sheets and will either be looking to make further acquisitions this year or returning cash to shareholders - either way a positive for investors.

"To summarise we believe the commodity market as a whole is fairly robust. Demand is still high and even though there are huge amounts of investment in the industry, a mine cannot just be opened and so the impact is many years down the line.

"But remember investments do not go up in a straight line and fluctuations are always likely, any good adviser will tell you that."