Gordon is a stockbroker and  principal with Morgans’ Caloundra office. Morgans are sponsors of marketcap.com.au. Contact Gordon here.

Equity Investment vs Commodity Investment

Gordon often gets asked by clients whether it is better to invest in a commodity rather than a company that produces that commodity.

“I get these queries when the client thinks that the commodity will be rising in price and they want direct physical exposure, such as through an Exchange Traded Fund.” Gordon advises that if the client is bullish on the commodity they should seek leverage against a price rise by investing in a producer of that commodity.

Naturally leverage works both ways. “ But Gordon advises, if you are already bullish, buy the company.” Gordon used the recent strength in the nickel price as an example.

Over the last year the nickel price has risen from around 6,000 USD/lb to around 8,500 USD/lb now, a gain of 40%.

Ni_Price

Gordon uses two examples to compare share price performance against the underlying commodity price.

He said “Western Areas Limited is a top tier nickel producer and, while leveraged against the nickel price, it is less volatile, or risky, than lower tier producers. These producers typically have lower production rates, lower grades or higher costs. They are more volatile and will typically have a greater swing than a tier one producer. An example is Panoramic Resources Limited.”

Over the same one year period as the chart above, Western Areas has risen 60% and Panoramic Resources 360%. Thus Western Areas has shown a  50% better gain than nickel itself and, in Gordon’s view, with not substantially more risk. Gordon notes that  “ for those with an appetite for risk, a producer such as Panoramic can show superb returns.”

Thanks Gordon, so what going to be the next metal to move …

DISCLAIMER The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual’s relevant personal circumstances. Read the full disclaimer here.

 

24 July 2014 Markets