The appeal of commodities as an asset class for retail investors has been strengthened immeasurably by the emergence of commodity-related exchange traded products (ETPs) which can be bought and sold as easily as equities, avoiding the burden of storing gold bars or delivering barrels of oil.
About $30bn (£18.6bn, ?21bn) of new money flowed into commodity-related ETPs in 2009 which proved a banner year for commodity markets when total investor inflows reached a record $68bn.
Total commodity assets under management (AUM) stood at $257bn at the end of last year, according to data from Barclays Capital, with assets held by commodity ETPs estimated at a record $91.5bn.
A growing number of investors are opting for ETPs as their preferred vehicle for gaining exposure to commodities in preference to structured products or indices such as the S&P GSCI index, which remains the most widely followed benchmark. At the end of the year, assets under management held by commodity indices stood at about $111bn.
But it is over the past decade that the growing appeal of commodity ETPs becomes clearer, with assets up 914 per cent ($91.5bn), while structured products AUM have increased 270 per cent ($54bn) compared with a rise of 19 per cent ($105bn) for commodity indices AUM, according to Barclays' estimates.
Gold played a starring role for commodity ETPs with inflows of 573 tonnes in 2009, which took total holdings to a record 1,762 tonnes, according to the World Gold Council.
Fearing a deep global recession and further volatility across financial markets, investors sought a haven in gold, while silver, platinum and palladium ETPs also saw huge inflows as these funds provide "easy access to hard assets".
Currency movements, particularly the outlook for the dollar, inflationary pressures and the strength of the global economic recovery should determine whether investor interest in gold remains strong this year.
Some analysts caution that redemptions from gold ETPs might increase if the pace of economic recovery improves and the dollar strengthens.
"We expect flows to precious metal funds to slow as investors look for value and divert attention to more volatile commodities, says Christos Costandinides, ETF strategist at Deutsche Bank: "We don't expect extreme outflows from precious metals ETPs (in 2010) but growth rates are likely to be slower than 2009."
A key part of the attraction of physically backed precious metals ETPs is that "what you see is what you get" and that counterparty risk - the danger that an investor will lose their money if a bank or fund goes bust - can be mitigated or avoided.
Michael John Lytle, director of marketing at Source, a specialist provider of exchange traded products, says that investors need to understand the structure of the product they are investing in and what this implies about counterparty risk. Mr Lytle also stresses the importance of understanding the efficiency with which a chosen commodity ETP delivers the returns that could be expected from a particular benchmark or individual commodity.
In 2009, crude oil prices rose by almost 80 per cent. However, some of the oil ETPs that invested in the benchmark front-month crude oil contract delivered only single digit returns.
A third area of concerns for Mr Lytle is trading liquidity. He says that it is essential for exchange traded products to have a range of market makers as this tightens bid/offer spreads, whereas structured products offered by some banks often only have one market maker - the originating bank.
"There is a rainbow of possible exposures to commodities available via exchange traded products but investors need to be aware which part of the spectrum they are analysing," says Mr Lytle.
Providers of commodity indices have been developing "enhanced" strategies that seek to deal with the frequent problem of "contango", where returns are negatively affected by the requirement to shift from an expiring front-month contract into a new benchmark contract because futures prices are higher than the prevailing front-month price.
The persistance of contango in crude oil prices does appear to have affected inflows in energy-related commodity ETPs. Barclays estimates that crude oil ETPs only received inflows of $663m, well below natural gas ETPs which attracted $6bn in new money. However, the total return from the S&P GSCI natural gas sub-index was down more than 50 per cent last year, providing another illustration of the problems that contango can bring to unwary investors. The threat of regulatory intervention in commodity markets remains open after the Commodity Futures Trading Commission, the US regulator, announced proposals to impose position limits on specific US energy contracts to curb speculation.
The proposals were widely viewed as relatively generous and likely to affect only a few of the largest trading houses, but some analysts remain concerned that these may be just an "opening shot" from regulators after President Barack Obama's plans to curb trading by investment banks.
Nick Moore, head of commodity strategy at the Royal Bank of Scotland says that the recovery in prices last year was accentuated by investment inflows, and investors' appetite for commodities remains strong.
However, Mr Moore gave a warning: "We expect speculation in commodities to remain a hot topic in the coming years and another spike in prices, akin to that of 2008, would likely prompt the authorities to attempt to further restrict investors' access to commodities."
