The two things that look as though they could seriously derail the economic recovery in Britain are high inflation and oil prices. It is thought by some economists that the recovery will be contingent on consumer confidence returning. This is because consumers need to at least think that they are able to spend in order for to deliver the boost from retail that it is believed that the economy needs.
With incomes falling against prices it seems unlikely that a retail bonanza is just around the corner. It is the largely the skyrocketing price of certain commodities that will keep prices rising faster than the spending power of consumers. Oil obviously is a major part of this, with the trouble in Libya continuing to add volatility to the situation.
Of courser it is not just the price of oil that is on the up. The cost of fuel is factored into the price of many other commodities. The price of cotton, for instance, has been seeing unprecedented rises. This means that clothing is set to become more expensive – although when it comes to retail, the cost of raw materials is always a tiny fraction of the price on the tag.
While rising commodity prices may be bad news for the economy overall, for canny investors they can provide as solid a bet as you could hope for – even though it is still a bet. If you think that the price is going to carry on rising and want to get in on the oil action there are a few options open to you.
For some direct investment exposure to crude oil prices so called ETF or exchange traded funds are popular. These are traded as shares, but one that reflect the fluctuating price of the asset – for instance crude oil. The situation for buyers is not so clear cut though and there are pitfalls that can befall the casual investor.
A perfect example of why it can be better to pay for investment portfolio management rather than going it alone can be found in what traders call the ‘Contango Effect‘. This is when the prices for future delivery for oil turn out to be higher than the present oil price. If funds invest in near-term futures contracts then this can cause the value of the funds to take a hit.
The alternative to direct exposure is to buy shares in energy companies. This is potentially a high risk strategy, as events like the Gulf oil spill can have a catastrophic effect on share prices. On the flip side, these companies always seem to bounce back and keep on making money, so perhaps these temporary dips in confidence represent a good chance to get on board with some cheap stock.
For those who have invested to funds,some exposure to the price of oil is all but inevitable. Almost a third of the FTSE index is made up of resource companies and commodities. Well known funds that invest particularly heavily in oil are the BlackRock World Energy fund and the BlackRock Commodities Income investment trust.
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