Emerging-market demand, supply constraints and inflation are among the reasons often cited in favor of commodities, but it didn't hurt that many companies have seen their stocks rebound very sharply off their lows.
One advantage to investing in companies that produce commodities, rather than the commodities themselves, is the benefit from leverage. For instance, if oil costs $80 per barrel and it goes to $100, you would gain 25 percent investing in oil. A company that produces oil at a cost of $60 a barrel would see its profit on each barrel rise from $20 to $40, a gain of 100 percent.
It doesn't work out that easily in real life, however, because the price of the commodity must increase faster than expenses. Farmers use fertilizers, miners need drills and oil producers need pipes, in addition to the energy that all three consume. Besides higher material and energy costs, there's also the risk of higher wages.The best time to own commodity-producing companies is when the demand for commodities causes them to rise faster than overall inflation. Many commodity bulls believe that greater demand from emerging markets, especially China and India, will drive prices higher with or without inflation. For those who expect higher commodity prices due to devalued currency, however, it's best to stick with the commodity itself. Back in June, when I first analyzed FFGCX, it had just launched and there wasn't much performance history or even a list of its holdings. We knew that it would be managed by Joe Wickwire, who also manages Fidelity Select Gold (FSAGX), and that it would track the MSCI All Country World Commodity Producers Sector Capped Index.