Commodities like oil offer high volatility and high gains

However, in recent years, commodities have gone through a phase when their prices have kept increasing. Oil has gone up to over US$136 (Bt4,500) per barrel. Gold has passed $1,000 per ounce. Rice has also reached a high recently. It seems to be the turn of commodities.

Intrinsically, commodities have cycles of ups and downs, mostly coinciding with the global economic cycle. However, this time the up cycle has been more prolonged than those in the past, creating the perception of a trend of ever-increasing prices. Commodity investment is different from equity investment, although they both offer high volatility and returns if the investment is made at the right time.

Although commodities do not have earnings projections or fundamental valuations such as projected cash flow, each has its own properties that affect its supply and demand and eventually its price. For example, gold is seen as a safe haven when there are global risks while other commodities are seen as a hedge against inflation. Since inflation is the result of the price of goods increasing and commodities constitute basic goods, in many cases the increase in price of some commodities is actually the fuel behind high inflation.

What is different this time from the past round of price increases for commodities? The oil-price increase has coincided with the urbanisation and development of emerging markets, particularly in China. As such, it is a massive development with growth of economic activity and it requires oil as an energy source. The increase in oil prices has a domino effect on demand for other energy sources - either conventional or renewable - which finally affects the demand for various agricultural goods to be used as a substitute for oil.

Use of fossil energy is also believed by some people to be the source of climate change, which creates droughts and floods in many areas and eventually results in a shortage of some agricultural products.

Increased urbanisation and better living standards also affect changes in consumption patterns and thus also result in higher demand for some agricultural products. These all add up to the prices of some commodities accelerating to levels we haven't seen before. As long as demand is still high with no imminent indications of increases in supply, there is still a case for investment in some commodities.

However, one also has to be aware of the nature of each commodity and how they influence the supply-demand equation. Some shortages might be temporary or seasonal and might lessen over the short term while others might be structural, which will require a longer time for price adjustments to settle down.

Prasert Khanobthamchai is senior fund manager with Kasikorn Asset Management's Balanced Fund Management Department.