The Multi Strategy Investment Division

Cadogan Asset Management

Cadogan Asset Management Ltd is authorised and regulated by the Financial Conduct Authority (FRN 749342). Registered in England & Wales (No.10065415)

©2016 by msicadogan.co.uk

Gold Blush

"Precious Metals can offer upheaval insurance against financial and political problems"

Commodities

Gold

Seen by many as the “king of the investments”, gold is perhaps the most notorious precious metal and is particularly notable for its durability as it doesn’t corrode or rust. It is principally used as a base for jewellery and for currency.

Gold is traded 24hrs a day with its price generally affected by demand and supply. As above-ground, hoarded gold vastly outweighs mine supply, the price for gold will drop when those that are hoarding the precious metal feel it is an appropriate time to sell. However, when they want to buy, supply is absorbed: and this leads to gold prices being driven even higher.

There are many factors that can trigger an increase in the hoarding of gold. These include: financial concerns, because, when banks are viewed as unstable, gold is regularly seen as a safe store of value; inflation uncertainty, because when the real estate, bond or equity markets are not positive people often turn to gold as it will usually retain its value; and in periods of political crisis or war

Silver

By contrast, the precious metal silver is often more volatile than gold with price fluctuations. This is because silver has two general roles: it is seen as a store for value and also as an industrial metal. This means that while silver will often trade in line with gold based on investment demand, the industrial demand for the metal also has a strong influence on its price. As such, the equation is always fluctuating.

For example, there have been a number of historical changes that have influenced the value of silver. It was once seen as the predominant metal in photography, for example, due to the use of silver-based film – however, this has since been eclipsed by the digital camera. Similarly, the rise of emerging markets in the East has created a huge demand for electrical appliances and medical products with silver a desired commodity particularly in the production of electrical connections. Silver is also vastly important in superconductor applications as well as batteries and microcircuits. As such, silver’s price is not only affected by its store of value, but also by its applications.

Oil

Oil is the world’s most commonly traded commodity. Also known as petroleum, it has its largest markets in New York, Singapore and London but both crude oil and its refined products are sold and bought throughout the world.

Available in a host of different varieties and qualities based on sulphur content and where it is pumped from, generally, oil prices that appear in media reports in Europe and the UK refer in general to the price of Brent crude oil, which is farmed from the North Sea and then is subsequently sold on the International Petroleum Exchange in London.Brent is seen as the world benchmark even though its sales are significantly below those of oil from Saudi Arabia, for example. Brent, according to the International Petroleum Exchange, is generally used to determine the prices of around two thirds of the oil markets in the world. However, in the Gulf, crude oil from Dubai is used; and the benchmark for the USA is the WTI, which stands for the West Texas Intermediate.

Perhaps most confusing is that the Organisation of Petroleum Exporting Countries (which is also referred to as Opec) has its own reference. This is a cartel consisting of some of the world’s leading producers and its basket price takes the average across 15 different crude oils. Its ambition is to control the volume of oil pumped into the market in an effort to keep basket prices set at a range that has been predetermined. Generally, price differences across the WTI, Opec and Brent are not that significant.

What drives Oil Prices?

There are several factors that influence oil prices, including:

Demand
Back in 2008, during the recession, world demand for oil was around 86-87million barrels a day. This has increased largely because of the growth of emerging markets looking to industrialise. However, some economies also offer fuel subsidies which can actually be a negative for a country’s economy because they prompt demand and can cause oil producers to effectively sell at a loss. Removing subsidies can actually increase oil production and therefore lower prices.

Supply
Discovering new oil reserves can have a significant effect on prices. For example, the discovery of new reserves in Brazil was encouraging, however, in general the oil fields in both the North Sea and Mexico have suffered declines in production. Most countries simply no longer have the ability to pump out large amounts of oil. Supply can also be affected by war and other conflicts.

Quality
There is also a lack of “sweet” crude oil within the marketplace – this is the type of oil that is needed for refineries to match environmental requirements.

Speculation
Another factor that drives oil prices is speculators and investors making bids on future contracts. Many institutional investors have become involved in the oil markets, such as endowment and pension funds: and they hold commodity linked investments as part of their long term asset strategy. Short term swings in oil prices have often been attributed to these speculators.

Oil Market Investment Opportunities

There are many reasons why oil prices fluctuate… and if you, as an investor, want to capitalise on these changes then you have a host of different options.

One is simply to invest in oil via service companies or oil drilling companies. There are also several mutual funds that will invest in energy related stocks.

However, for a more direct exposure to oil prices, investors can focus on exchange traded funds (ETF) or exchange traded notes (ETN). With oil prices generally uncorrelated from the stock markets and the direction of the US dollar, products are able to follow the price of oil much more closely than energy stocks and, as such, they are often used as a portfolio diversifier or they can serve as a hedge.

There are many ETN and ETF options to choose from including single and multi-commodity ETFs. The oil market presents an array of options for investors. However, it is vital to do your research before committing your money and ensure that you consult an investment professional who can help predict price changes and increase your chances of making a profitable investment.

Our MSI team at Cadogan offers Oil in CFD format as a way to access these markets for our clientele.