[Practical Finance] 'Financial and Political' Uncertainty as Opportunity... Commodity ETFs Emerging as Alternative Investments

'Gold, Silver, and Crude Oil' Prices Fluctuate Amid Middle East Conflict
Commodity ETF Prices Rise...Inflow of Individual Investment Funds

Raw materials are physical substances such as crude oil, precious metals, minerals, and agricultural products that are essential raw materials for human life. From an investment perspective, they are not assets like stocks and bonds that are actively traded in the market or attract large-scale funds. However, when the financial market is unstable due to various political and economic issues, they become excellent alternative investment destinations that can protect or enhance investment returns.

Jim Rogers, one of the world's top three investors and a legendary investor, recently stated in an interview with foreign media, "Excessive debt is causing problems in all assets such as stocks and bonds," and pointed out, "In an inflationary environment, tangible assets are the best investment, and among them, raw materials are currently the most undervalued." Marco Kolobonich, Chief Strategist at JP Morgan, also advised, "The possibility of a recession next year is quite high," and "It is effective to increase the proportion of raw materials, which have already undergone price adjustments reflecting the economy in advance."

The Best Investment in an Inflationary Environment is Tangible Assets

Raw materials are assets whose prices rise ironically fueled by uncertainty. Mainly, financial instability and international political unrest such as the outbreak of war act as investment opportunities. We experienced a surge in natural gas and agricultural product prices at the beginning of the Ukraine war. Recently, due to the conflict between Israel and the Palestinian armed group Hamas, instability in the Middle East has caused crude oil prices and precious metals such as gold and silver to rise sharply.

The most practical way for retail investors to invest in raw materials is to use exchange-traded funds (ETFs) listed on the domestic stock market. Although there are methods such as physical investment and futures investment, there are many practical investment constraints. Investing in physical commodities incurs enormous storage costs. Moreover, it is difficult to respond quickly to market changes by buying or selling. Raw material derivatives traded on exchanges such as the Chicago Mercantile Exchange (CME) and the London Metal Exchange (LME) carry high risks due to leverage and price volatility.

For this reason, individual investors trying to catch the rising gold price bus are flocking to gold ETFs. As gold prices rise due to financial instability and the Middle East war, funds are flowing into ETFs, which are more convenient than physical investment. The representative domestic gold ETF, Korea Investment Trust Management's ‘ACE KRX Gold Spot’, showed a 5.26% return over the past week. Since the beginning of the year, it has shown a 14.94% return. TIGER Gold Futures (H), managed by Mirae Asset Asset Management, also showed a return of over 5% in the past week.

Nam Yong-su, head of the ETF management division at Korea Investment Trust Management, introduced, "ACE KRX Gold Spot is an ETF that directly invests in physical gold, allowing small amounts to conveniently invest in physical gold," and added, "It is the only gold ETF available for investment in retirement accounts such as personal pensions, retirement savings, and individual retirement pensions (IRP)." He explained, "The popularity of gold ETFs is due to increased financial market uncertainty following the consecutive bankruptcies of regional banks in the U.S. earlier this year and the spread of international political instability triggered by the Middle East."

Silver prices, known to track gold prices, are also showing an upward trend. Silver investment ETFs such as ‘KODEX Silver Futures (H)’ and ‘TIGER Gold & Silver Futures (H)’, which invest simultaneously in gold and silver, formed yearly lows in early October and have been steadily rising this month.

As oil prices rise due to the Middle East conflict, crude oil ETFs are also attracting attention. Samsung Asset Management’s KODEX WTI Crude Oil Futures (H) recorded net assets of 76.6 billion KRW and posted a 7.76% return over the past week. Mirae Asset Asset Management’s ‘TIGER Crude Oil Futures Enhanced (H)’ also showed a high return of over 7% during the same period.

However, as the Israel-Palestine war did not escalate and diplomatic efforts found a way to resolve the conflict, the previously unstable situation somewhat stabilized, causing oil prices to decline again. Such fluctuations in oil prices seem inevitable for the time being. A Korea Investment Trust Management official explained, "Recently, the Middle East conflict raised concerns that Western countries might control oil exports, which led to increased interest in crude oil ETFs that can generate positive returns when oil prices rise."

Hwang Byung-jin, head of NH Investment & Securities FICC (bonds, foreign exchange, commodities) research department, predicted, "If the military conflict does not spread to major oil-producing countries, a surge in oil prices breaking through $100 per barrel will not occur again," but added, "In a situation where the conflict continues, oil prices are likely to form strong downward rigidity, and high oil prices around $90 per barrel are expected to persist in the short term."

Copper and Agricultural Product Prices Rebound...Related ETFs Expected to Rise

As copper and agricultural product prices rise, interest in related ETFs is also increasing. Expectations of benefits from increased copper demand and rising agricultural product prices due to climate change have been partially reflected. Copper ETFs such as ‘TIGER Copper Physical’ and ‘KODEX Copper Futures’, and agricultural product ETFs such as ‘TIGER Agricultural Futures Enhanced (H)’, ‘KODEX 3 Major Agricultural Futures’, and ‘KODEX Soybean Futures (H)’ have bottomed out and rebounded since October.

An asset management company’s raw materials manager said, "Prices of metals used in electric vehicle battery cathode materials such as nickel and cobalt have recently undergone significant price adjustments," and forecasted, "If demand recovers, prices are likely to rise overall."

However, it is known that individual funds are mainly flowing into gold ETFs as investors’ preference for safe assets strengthens. An industry insider said, "Although some raw material investment ETFs are attracting individual funds, it is difficult to say that all raw material ETFs are receiving attention," and added, "Most of the products that have recently seen net buying by individuals are related to gold."