Investing in commodities: Rust-proof

GRAIN silos, oil pipelines and copper smelters are not exactly glamorous. Yet for a glorious couple of years up until mid-2008, commodities were all the rage. China was booming, and supplies of everything from soyabeans to iron ore were failing to keep pace, prompting a giddy leap in prices. Financial engineers minted all manner of products tied to these movements. Not only were commodities on a roll, their patter went; they also provided a crucial hedge for any diversified portfolio, since they did not move in tandem with other assets.This spiel convinced all sorts of big investors to pile in. Pension funds, endowments, sovereign-wealth funds and the like scrambled to grab a piece of the commodities boom, only to see prices wobble along with the world economy, and then slip as China’s growth slowed. Yet overall investment in commodities has barely fallen, even though the sales pitch that drummed it up has been largely disproved.

According to Barclays bank, the flood of investment in commodities reversed only slightly this year (see chart). If gold, which behaves more like a currency, is left out of the picture, the sum of commodity-related assets…

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