The reasoning behind investing in some commodities is understandable – you can’t make any more of something that’s running out like oil and gold.
Of course, the world is consuming more commodities – the population is mushrooming and will soon reach 8 billion and every extra person increases the amount of commodities consumed every day.
Another theory is not only are there more people, but those people want more, especially those who were locked in the economic cocoon of communism for decades.
Demand for oil has grown as current resources shrink and become harder to extract, while political unrest around North Africa and the Middle East have made supply uncertain.
Investors also see tangible, tradable gold as a hedge against inflation and a haven against devaluing currencies.
That’s why investment analyst Angelos Damaskos, chief executive of Sector Investment Managers, has developed nine reasons to invest in companies involved in extracting oil and gold:
- Companies that control large reserves/resources
- Companies with good management teams
- Companies adding reserves through exploration
- The deposits must be in a safe jurisdiction, with no significant exposure in places like Russia, Venezuela or Kazakhstan.
- A strong reserve/resource position. Check market capitalisation per unit of resources of the company – the cheaper per ounce of gold or per barrel of oil, the better.
- No serious environmental problems
- A company with a strong balance sheet with cash, little or no debt and no major future capital liabilities
- Unhedged future production
- Strong cash flow compared with competitors
“Under the current economic circumstances, I feel safer investing in oil and gold equities than any other investment,” said Damaskos.
“‘If on the one hand we have an ongoing, unresolved crisis around the eurozone, we can expect gold to be in demand as a safe haven.
‘If on the other hand there is some form of a solution to the eurozone’s debt problems, we can expect this to bring about inflation. That again would make gold desirable.”
