May 6, 2011 6:26 pm

Commodities fall exposes investors

Private investors who have piled into commodities are now overexposed to the sector and should view this week’s dramatic price falls as a “wake-up call”, warn advisers.

The concerns came after steep slides in commodity prices this week, including a 30 per cent fall in the value of silver and a 3 per cent drop in the price of gold. While prices picked up slightly on Friday, analysts warned that the market was likely to remain volatile.

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Private investors att-racted by rocketing returns have poured millions of pounds into commodity funds and exchange-traded funds that track commodity prices over the past few years.

But advisers say many may be unaware they also have exposure to commodities through broad-based equity portfolios that are benchmarked against the FTSE 100.

“There is a real danger that people are doubly exposed to commodities and have taken on more risk than they realise,” said Patrick Connolly at financial advisers AWD Chase de Vere. “Ninety per cent of equity investors will now have some form of exposure to commodities in their portfolios.”

Among the FTSE 100’s top holdings are seven oil and gas companies including Royal Dutch Shell, BP and BG Group and 11 mining companies including BHP Billiton, Anglo American, Xstrata and Rio Tinto.

“This means that when that sector falls in price, those investors will be hit by a double whammy in falls,” says Connolly.

Falls in commodity prices this week were triggered by uncertainty surrounding the US employment market and a signal by the European Central Bank that an interest rate increase was unlikely in June.

Gold fell this week from record highs of $1,575 to $1,486, while the price of silver dropped from $48 to $34.

Brokers reported a sharp rise in the number of calls from clients concerned about their holdings.

“This week’s price falls have been a ‘wake-up call’ for investors,” said Rob Burgemen, investment manager at Brewin Dolphin. “Some have realised how overexposed they are to commodities and want to do something about it.”

But he said many of the reasons for holding commodities remained, such as a lack of confidence in the dollar and concern about the geopolitical situation. “How much gold people want to continue to hold will depend on how nervous they feel,” said Burgeman. “It is often held as a hedge against inflation.”

Others also cautioned against a hasty sale.

“The long-term outlook for commodities remains fairly positive – in particular, oil is likely to continue to rise buoyed by rising demand – but investors must be prepared to
accept high levels of volatility,” said Jonathan Jackson, head of equities at
Killik & Co.

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