Commodity investing with added protection

I wish to invest in the commodity boom as I regret not having invested in oil and metals by now. I am, however, a little nervous and would wish a level of protection to the way I invest. I am happy to invest for five-six years so long as my original capital is safe. What is a secure way of doing so?

Commodity investing is a very hot topic with the price of US crude oil now around $70 a barrel and precious metals such as gold and silver at all-time highs.

The amount of articles being written about the huge demand, from China especially, means it is quite natural in such 'bullish times' for investors to jump on the bandwagon and look for investment opportunities as prices soar.

After making the necessary adjustments for inflation, the reality is that commodities are in fact priced at a near-time low. If this is the case, then it is natural to assume that prices still have a good opportunity of increasing further. A major factor that will determine the short- and longer-term prospects for commodity prices is, as I say, the demand from China.

China is now the world's second largest importer of oil and the world's biggest importer of aluminium. This demand for commodities is expected to increase year on year and, if demand is increasing, so will the price.

If you remain slightly nervous of the growth prospects of commodities going forward, then you should definitely be looking to add a level of security. There are many investment funds that speculate on the price of oil and other commodities, or of course you can do so yourself.

There are online brokers that allow you to trade on a variety of commodities from as far apart as copper to coffee beans. You must however observe the risks of doing so. Although large gains can be made, so can large losses!

For this reason, I would recommend an investment fund that tracks the official price of one or more commodities, i.e. from the metal exchange in the UK. There are funds that invest across various commodities such as oil, natural gas, lead and copper.

The value of your investment will therefore reflect the increase/decrease of the relevant exchange prices. Rather that just receive the growth, you can expect to receive approximately 150% of the increase over a five- to six-year period. If the commodity portfolio therefore went up by 50% over the period, you would receive 75% of your capital on maturity.

To add the required protection, there are also investment funds that, in addition, offer a 100% capital protection at maturity while still enjoying, say 150%, of the growth. In this example, you are therefore able to receive 150% of the increase with the knowledge that your capital is also protected if the investment is held to maturity.

I would strongly argue that commodities should form part of most investment portfolios and investing in the above way, with added capital protection, can be done from as little as Lm10,000.

Mark Hollingsworth is the director of Hollingsworth International Financial Services - licensed by the MFSA to provide investment services under the Investment Services Act 1994 (IS/32457). Address any financial questions to: Mark Hollingsworth, c/o The Sunday Times, PO Box 328, Valletta CMR 01. Alternatively, he can be contacted on 2131-6298/9984-2614 (office hours) or e-mail mh@hollingsworth-int.com

Past performance is no guide to the future and, except where amounts are guaranteed, the price of your investments (and the currency in which it is denominated) may fall as well as rise. Your personal tax situation will depend on residence. Always consult a professional adviser. This article does not intend to give investment advice and its contents should not be construed as such. Readers are encouraged to seek professional advice on their personal financial situation.