The great and the good of the commodities industry will descend on Dubai next week.
With local stock markets in freefall and commodities such as gold and copper rising sharply in recent months, many investors in the UAE are being tempted into putting their cash into commodities. They should tread carefully.
Why all the fuss about commodities at the moment?
They are the flavour of the month for a couple of reasons.
First, real demand for base metals such as copper is strong because the global economy is booming.
Construction in places like China, India and the Middle East means builders need more copper pipes. That drives up the price.
What about speculators?
You've hit the nail on the head. While real demand is a factor, demand from financial investors on futures markets is really driving the market. Hedge funds in particular are piling into copper markets, but also precious metals, especially gold. Each market has its own dynamics with copper, the underlying mover is construction demand. With gold, it's investors buying the yellow stuff as a hedge against inflation.
Sorry, how does owning bracelets protect you against inflation?
Many investors fear rumblings between Iran and the US over nuclear stuff may lead Tehran to stop pumping oil. That would drive up the price of oil, which would drive up inflation.
Traditionally, investors have bought gold as a so-called "safe haven" asset in times of inflation.
While inflation can quickly wipe out the value of paper assets, like cash in the bank or bonds, gold is tangible. As is often the case with markets, this psychol ogy is self-fulfilling. Investors think other investors will buy gold as a hedge against inflation, so everyone buys it.That drives the price higher.
How much higher?
Gold closed at $651 (Dh2,391) an ounce in NewYork on Friday that's up almost 50 per cent in a year, but down from $725 (Dh2,662) an ounce earlier this month (the highest gold price in a quarter of a century).
And copper?
Even more spectacular. Copper closed at $3.76 (Dh13.8) per pound on Friday in New York up from just $1.50 (Dh5.5)a year ago.
So does that mean we should all rush out and buy commodities at next week's conference in Dubai? Some would say yes. Daniel Sacks, head of resources at Investec Asset Management, last week forecast that gold could go even higher: "The gold price is being driven upwards by fear fear of oil-induced inflation, fear of a weaker dollar... and fear of geopolitical turmoil in Iran."
Sounds great. What's the catch?
Take the last great gold bull run. Back in 1980, gold touched $850 (Dh3,121) on January 21 after almost doubling in price in a month.Within a week it had fallen below $650 (Dh2,387), and never looked close to touching $850 again for 26 years. Taking a step back, history suggests that what goes up must come down, whether it's gold in 1980, dot-com stocks in 2000 or shares in Dubai in 2006.
Ask yourself this question before you put your hard-earned savings into copper funds: do you really think the current commodities rally will be different?
© Emirates Today 2006
