Commodity Prices Are Rallying! So What Should You Do?

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A perfect cauldron has formed in recent weeks to drive commodity prices through the roof again.

Fresh monetary easing by the People's Bank of China and the European Central Bank has helped boost demand expectations, while a weakening US dollar has made commodities 'cheaper' to purchase, prompting a flurry of buying activity.

This backcloth -- along with a generous amounts of short-covering -- has helped to propel share prices of the world's biggest mining and energy companies skywards again. Diversified bruisers Glencore and Anglo American  have both seen their stock values ascend by approximately 60% in the past month alone, for example.

Built to last?

But given the chronic supply/demand imbalances still hanging over the oil and gas segment and many metals markets, I believe recent heady gains have left these firms in danger of a severe price correction.

Indeed, UBS has warned that "the current surge in commodity prices may be a short-term phenomenon," noting that "for sustainable price upside, we believe the most important factor is an acceleration of demand."

The broker added that "supply discipline and an end to cost deflation are also important, but we really need a demand shift."

UBS noted, for example, that Chinese apparent copper demand edged just 2.8% higher in 2015, to 11.5m tonnes due to the country's shift more towards a services-based economy.

Pockets of opportunity

But that's not to say the entire commodities segment is a bombed-out mess.

Indeed, there are plenty of resources markets not suffering from the vast supply and demand chasms smacking many metals and energy markets, and these can be played by plunging into the wide world of exchange-traded funds (or ETFs), securities that rise along with the price of the underlying asset.

One such security with strong investment potential is cocoa, in my opinion, the impact of persistent dry weather in the production heartlands of West Africa casting a pall over future supply. The International Cocoa Organization has forecast an 113,000-tonne market deficit for 2015/2016 as it estimates global production sinking 1.8%, to 4.154m tonnes.

And those with a bullish take on the agricultural commodity can bet on a rising price by buying into ETFS Cocoa(LSE: COCO), which trades in correlation with the wider cocoa price.

Go short!

Another way to make a mint from the commodity markets is by purchasing a 'short' ETF, i.e. one that moves inversely to material prices.

So a sharp correction in the copper price, for example, could pay off handsomely for someone who has ploughed their cash into ETFS Short Copper(LSE: SCOP). And like conventional ETFs, there are plenty of 'short' options to choose from.

Traders can select individual commodities to trade against, like ETFS Short Brent Crude (LSE: SBRT) or ETFS Short Silver (LSE: SSIL). And there's even an option to trade against a basket of commodities -- the EFTS Short Industrial Metals (LSE: SIME) inversely tracks the copper, aluminium, zinc and nickel price.

So in my opinion there's plenty of opportunity for savvy investors to enjoy resplendent returns by playing the commodity markets.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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