Wheat is down 30%, corn up 10%, gold up 21%, and natural gas down 32% – the progress of commodities in 2011 presents a patternless set of data.

>Commodities are notoriously heterogeneous, and each ones pricing depends on a host of quite different factors. Often events that impact one commodity positively will prove a negative drag on another.

Making sense of it all is a lot to ask of a private investor.

Overall, commodity prices have pulled back recently on fears that economic growth will be sluggish. But while growth in the developed world looks set to be disappointing, it should be more than offset by economic strength across Asia and in particular China, which is still expected to grow at a rate of 8% next year.

The protracted European sovereign debt crisis has also dented confidence, but many commentators think Europes leaders will avert financial crisis. Having said that, low returns on other investments can help to drive demand for commodities.

For many commodities, the fundamental attractions have not materially weakened from where they were pre-2008. Jim Rogers, the famous commodity bull, points out for example that although sugar has risen steeply, it is still 60% below its all-time high. What else do you know that is 60% below its all-time high? he asks.

There is a good chance broad commodity prices could firm up again in 2012, though we are probably looking beyond the first quarter of next year for sentiment to really improve.

While most investors focus on demand – because it is easier to grip and understand – the other side of the equation is the supply position and the state of inventories. These are also diverse and dependent on myriad geopolitical factors, weather conditions, the industrial climate and even fashion.

For instance, supply of copper has been interrupted by industrial action at mines in Zambia, Peru and Indonesia. Copper is therefore unusual in being in supply deficit, and will be furiously in demand by Chinas massive investment in social housing.

However, not everyone believes that China can save the market – BMO >Capital Markets, for example, argues that industrial metals will struggle to make any serious headway in 2012 despite Asian growth.

At the other extreme, energy is in oversupply. Currently there is enough oil for 93 days of use compared with an historical average of 88 days. Natural gas faces particular excess as huge growth in extracting US shale formations outpaces consumption, and underground gas storage in the US has hit record levels.

The diversity of experience in production of crops is also enormous and at times contradictory. Corn has suffered from poor weather conditions and is in low stock while this years wheat crop has been exceptional, prompting the International Grains Council to hike their production forecasts for the grain. The floods in Thailand have taken out many rice crops and put pressure on all substitute products.

Hog prices have risen by nearly 30% over the course of the year partly as a consequence of buoyant demand from China and South Korea. In contrast, the price of canola (edible rapeseed oil) has been slipping all year as supplies of the oilseeds increase.

Most investor focus on precious metals, and there is no shortage of bets on gold topping the performance charts next year. TD Economics, for example, says that gold is heading towards $2,100. Gold also has the backing of Rogers. Adjusted for inflation, gold should rise to $2,400; it is already at $1,800 and the commodity bull market has at least a year to go, he says.

Gold is a special case, however. Its price is highly volatile and could crash if the global economy recovers as it is very largely supported by investors looking for a safe haven.

There are strong arguments for investing instead in platinum, because, historically, platinum has traded at a premium to gold, but the position has reversed recently. Platinum is $150 cheaper than gold but there is no reason why this should be the case as both are scarce and platinum is also widely used in industrial processes, says Chris Eibl, managing partner at Tiberius Asset Management. It does not make sense to be long gold in this environment. Platinum is the safe bet.

The strongest underperforming precious metal will be silver, he adds, not only because it is in oversupply but because so much of the demand is from investors and there is no other industrial or medical application that could absorb demand to the same scale.

Looking for a guide to gaining exposure to platinum? Read: How to trade platinum and palladium.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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