Commodity Online
Recently, the world saw the launch of the first Hard Assets Producers (HAP) Exchange Traded Fund (ETF), promoted by New York-based asset manager Van Eck Global. The HAP ETF tracks the price and yield performance of the Rogers-Van Eck Hard Assets Producers Index developed under the guidance of
Jim Rogers, renowned investor, advisor and co-founder of Quantum Fund.
The index, which is a definitive global benchmark for commodity equities, was constructed in collaboration with S-Network Global Indexes, LLC.
The launch of the maiden HAP fund has raised curiosity about what hard assets are all about and the fact that this asset class has been identified as worthy of investment by none other than Jim Rogers.
HARD ASSETS Hard assets are investments with intrinsic value such as oil, natural gas, gold, farmland, and commercial real estate, according to Wikipedia. The term hard assets refers to the natural resources or commodities that are mined, harvested or otherwise procured from all corners of the globe. Because these raw materials are essential to the production of goods and services, they constitute the building blocks of economic growth. In aggregate, they account for 16% of world output and comprise the largest non-financial sector in the global economy. Worldwide, the companies that are principally involved in commodities production represent over 20 per cent of total stock market capitalisation.
HARD ASSET GROUPINGS Traditionally, hard assets have been grouped under five broad categories — energy (oil and gas), agriculture (grains, livestock, sugar, coffee etc), base metals (copper and aluminium), precious metals (gold, silver and platinum) and forest products (lumber). Recently a new category has emerged — water plus renewable energy sources such as solar and wind. In global consumption among the six categories of hard assets, energy constitutes 41 per cent of global consumption, agriculture (31%), base metals (13%), precious metals (7%), forest products (4%), water and renewable energy (4%).
WHAT IS RVEI INDEX? Rogers–Van Eck Hard Assets Producers Index (RVEI) Index is comprehensive in construction, covering the world’s largest and most prominent publicly owned companies engaged in the production and distribution of hard assets and related products and services — at its launch, 310 companies in 39 countries and six sectors. It is the first commodity equity index to include water and renewable energy (solar and wind) — increasingly important natural resources — and it utilizes consumption-based weights that afford balanced sector exposure among the six sectors. “RVEI contains the stocks of companies that are involved in producing real assets around the world — assets such as agricultural goods, metals and energy. These are some of the largest and most important companies in the world. If you think that real assets are going to continue to do well, RVEI may be the perfect way for you to invest — if you want to invest in stocks,” according to Jim Rogers.
Historical data shows that hard assets sector tends to cycle through long successive bull and bear markets. From the late 1950s through 1980, the bull market was fueled by baby-boom driven economic growth in the US, the development of Japan, Korean and Taiwan and the Middle East oil crisis. This was followed by a 20-year bear market brought in part by a deceleration in global growth and the massive liquidation of commodity inventories by the cash-poor ex-Soviet bloc after the end of the Cold War. Since the early 2000s a new hard assets bull market emerged which is a demand-driven phenomenon that primarily reflects the unprecedented level of industrialisation now taking place in China, India and much of the emerging world. This trend is so powerful that many observers believe it will cause a secular rise in hard assets prices for the next 15 to 20 years.
According to Van Eck Global, hard assets offer the following advantages: Additional portfolio diversification, potentially competitive returns, hedge against inflation, exposure to key global economic sectors and complements other alternative investments.
hardassetsinvestor.com
hardassetsinvestor.com is a New York based-Van Eck Associates-sponsored, research-oriented website devoted to sharing ideas about hard assets investing. The site has been developed as an educational resource for both individual and institutional investors interested in learning more about commodity equities, commodity Futures and gold (the three major components of the hard assets marketplace). The site focuses on hard assets investing, without endorsing or recommending any particular investment product or approach
SOFT COMMODITIES Soft commodities are typically grown, while hard commodities are typically mined or extracted. Orange juice, corn, wheat, lean hogs, coffee, sugar and cocoa beans are all examples of ‘soft’ commodities. Many soft commodities are subject to spoilage, which can create huge volatility in the short-term. If you’re sitting on 30,000 pounds of cocoa beans and the price drops, you might have to dump them onto the market whether you want to or not. On the flip side, a well-timed, narrow investment in a soft commodity can yield phenomenal gains if you buy in at just the right time.
Producers are often large players in the “softs” market. Farmers, for instance, regularly hedge their crops by selling Futures contracts and locking in prices. This demand, combined with the natural growing cycle of many of these commodities, can create a natural seasonality in prices, which investors must consider as they’re looking into the space. Weather plays a huge role in the softs market, which makes predicting supply especially difficult.
HARD COMMODITIES “Hard” commodities are typically mined from the ground or taken from other natural resources: gold, oil, rubber, aluminum. In many cases, initial products are refined into further commodities, as oil is refined into gasoline. Some agricultural products — such as cotton — are also considered “hard” commodities, because they don’t rot quickly and because they are industrial materials rather than foodstuffs. Because “hard” commodities are easier to handle than “softs”, and because they are more integrated into the industrial process, most investors focus on these products. That’s changing to an extent as “softs” like corn and sugar are transformed into ethanol-based energy products, but still, hard commodities dominate the marketplace. For instance, literally trillions of dollars of oil Futures trade hands each year.
EMERGING COMMODITIES Beyond these, there is a whole class of goods that most of us consider commodities, but for whatever reasons, have no liquid Futures market. These include things like coal, timber and iron. There are also “emerging commodities” like water (and water rights), pollution rights and ethanol, which many expect to develop into booming markets in 5-10 years. There are serious investors who believe that these commodities function in a similar fashion to other commodities, and that they deserve a place in a commodities portfolio. For now, investors can only access these commodities by buying stock in companies that operate in these fields.
