How commodities are outperforming shares and how you can invest...

All that glisters... the gold price soars

Gold is trading at record highs and likely to be heading towards $1000/ounce, crude oil is trading at more than $100/barrel. In soft commodities, coffee surged to its highest level in 12 years on February 25 on expectations of supply shortages this year; at the same time, wheat recorded its biggest one-day rise ever, jumping 25% to a new record high.

Commodities were already the top performing asset class in 2007 and look set fair to be the top performing asset class in 2008. HBOS subsidiary Clerical Medical Assetwatch's biannual study, which tracks the value of five asset classes over a ten-year period, reported commodities provided a return of 20.6% last year.

"Soybeans were the strongest performing commodity... as farmers in the U.S. and elsewhere cut back production of the crop in order to grow more corn for the biofuels industry," the study said. Soybeans rose 77.5% thanks to strong demand from China and India but commodities did not show an across the board rise. Base metal prices actually fell back in 2007. Zinc was the worst performer, down by almost 45% although precious metals showed a positive return of 26.4%.

Request Free brochures on share dealing, spread betting and CFDs.

The rally in precious metals has continued with not only gold hitting new highs; platinum has been setting new records early in 2008 on supply worries sparked by power shortages in South Africa. Residential property (up 10.7%) provided the second highest return after commodities, outperforming the domestic stock market (up 5.3%) for the first time since 2004.

The underlying fundamentals of the grains complex, including wheat, soybeans and corn, remain strong. Demand growth continues with emerging country incomes rising, resulting in increased meat consumption and thus demand for animal feed such as soybeans. Corn-based ethanol production continues to rise while global stocks of wheat, corn and soybeans continue to fall, especially wheat, which was severely affected by bad weather last year.

Among soft commodities, demand for cotton is expected to increase on the back of higher synthetic prices (a substitute for cotton), higher emerging market incomes (allowing demand to switch to higher-cost cotton fabrics) and potential crop rotation from cotton to corn.

With the outlook for equities uncertain this year, investing in commodities makes sense. Four of the 10 top performing funds across all asset classes in the past 12 months are commodities funds - Merrill Lynch Gold & General, First State Global Resources, Investec Global Gold and JPM Natural Resources.

Want to track your investments? Moneyextra's free portfolio service has all the tools you need.

Commodity Investment Funds

There are only a handful of actively managed commodity-based funds. Those looking for exposure to moves in the gold price have an effective choice of but three Merrill Lynch Gold & General, CF Ruffer Baker Steel Gold and Investec Global Gold. The Merrill Lynch fund is the largest by a significant order of magnitude.

Those looking for a broader exposure to commodities still have only a small number of funds from which to choose. The Merrill Lynch World Mining Investment Trust offers exposure to a basket of 30-40 global mining stocks.

JP Morgan Natural Resources is the longest-established unit trust investing in commodities. Alternatives include First State Global Resources and the Merrill Lynch Commodities Income Investment Trust.

There are also a couple of agriculture funds available, Ceres Agriculture Fund and Eclectica Agriculture. The Schroder Alternative Solution Agriculture Fund has now closed to fresh investment after a near doubling of funds under management in a matter of months.

Find out how your investment fund is performing now.