The only things worth buying in the commodities sector right now

It’s been a grim year for the resources sector, and it’s ending with a bang (not to mention, I suspect, a fair bit of whimpering).

This morning, Brent crude fell below its December 2008 low. Meanwhile, 21 of the 22 constituents in the Bloomberg Commodity Index have fallen in the year to date – the worst showing since 2008.

Is there any sign of a turnaround? Or can we expect an equally grim 2016?

A bad year for commodities

The only commodity whose price has gone up this year so far is cotton, apparently. That’s according to the Bloomberg Commodity Index. The price is up around 4%, helped by a shrinking global harvest.

As for the rest – it’s a mess. Oil, of course, has collapsed, amid a glut of supply. But it’s far from the only casualty: unusually warm weather has hit natural gas prices, decent harvests have hit grain prices, and rising pork production has dented the price of ‘lean hogs’.

Obviously, the first question on any contrarian’s mind right now is “when will it be time to buy?”

Scary headlines are often a good sign. And there are some tentative indicators of a bottom: last month, reports the FT, the US futures regulator stopped “publishing data on commodity index investment due to a low level of interest”.

The end of the ‘financialisation’ of commodities would be no bad thing. Investing in commodities directly as a separate asset class in themselves has never been a sensible idea.

Commodities are not an appreciating asset, they don’t generate an income, and they cost money to store. And in the natural course of things, they should become less valuable as technology advances and we all become more efficient and productive.

A long-term bet on commodities is a bet against human ingenuity, and that’s so far proved to be a losing bet. (And the day that it isn’t, we’ll have more important things to worry about, frankly.)

However, there’s nothing wrong with investing in commodity-producing companies. Just as with any other cyclical industry – such as housebuilding – buying at the right time in the cycle can be extremely profitable. And when investors are giving up on a sector, it’s often a sign that sentiment can’t get much worse.

So is now the right time?

We’re not convinced yet. In the latest issue of MoneyWeek magazine, Edward Chancellor talks to Merryn Somerset Webb about why he thinks we’re not quite there yet for most areas of the mining sector – except for gold mines, which are very much there. (You can watch the interview here.)

However, just because it’s not time to dive in wholesale, doesn’t mean you can’t find worthwhile investments out there. My colleague Alex Williams digs into the mining sector to see which stocks are standing out as survivors from the fallout – and looks at why now could be the right time to buy them.

(If you’re not already a subscriber, I suspect these ideas alone could make it very worth your while getting off the fence now – sign up today and you can read them online).

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