“BHP is going to decide on a write-down of Natural Gas assets ( http://www.foxbusiness.com/news/2012/05/14/bhp-decision-looms-on-us-shale-writedown-executive/ ) due to low prices. Can this be seen as anything other than a trend of serial wealth destruction by the largest miner in the world? Following the botched takeover of Potash and the failed JV with another "wonder miner", Rio "I can't believe I bought the top in Alcan" Tinto?

I say this as someone who has periodically owned these putative autonomies as a way to express a view in commodities. After yet another misstep by BHP, I'm coming to the conclusion that unless you got in in 2001, its silly to invest in companies when what I want are real assets - gold, copper, and uranium - to protect my wealth. This holds true for Cameco, Newmont, and BP.

I recognize this is probably symptomatic of a bottom rather than a top in commodities, but sure argues for an asset allocation approach rather than concentration. I think Don Coxe recommends 5% in commodity related equities, which seems about right.

Eoin Treacy's view Thank you for this topical email which I'm sure will be of interest to other subscribers. We have long shared your frustration with the management of large diversified miners such as BHP Billiton and Rio Tinto. They really should concentrate more on running their businesses rather than attempting record beating takeovers and joint ventures with our money. In what has been a three-year period characterised by wild swings, diversified miners have been even more volatile. This is wearing in terms of investor forbearance and, as you point out, people are questioning the ability of such companies to adequately reflect the performance of the major commodities they mine and drill for.

BHP Billiton is not alone in having paid up for US onshore drilling rights. While in hindsight we might see this as folly, in many respects they had little choice. US unconventional oil and gas resources are a major growth sector. As the article you attach suggests, a write-down of the pure play natural gas assets purchased from Petrohawk is a realistic possibility. However, the gas liquids assets are much more lucrative due to the high oil price. The primary reason natural gas prices fell so much was because of the supply glut. As of today, the USA still does not have an export facility. That situation will change in the next few years and subsequently, a global pricing structure for the commodity may develop. At that point, access to reserves is likely to be a much more important factor than what was paid for them. Meanwhile BHP Billiton is an S&P Europe 350 Dividend Aristocrat currently yielding 4.26% gross.

We have long been critical of funds that use futures to track the commodity's price. They often take no account of contango, interest rates or management fees. Funds such as the US Oil Fund and US Natural Gas fund have been additionally impacted because their roll schedule was so transparent and open to exploitation by traders. The least risky was of tracking commodity prices and in my experience the most effective are commodity funds backed by the physical metal.

There are a number of such funds for gold quoted in the USA, UK, Switzerland and Australia and denominated in a number of currencies. Please see Comment of the Day on December 11th 2011 for details of these funds.

ETF Securities released a physical copper ETF last year in the UK and it has done a reasonable job of tracking the copper price. However, after nearly a year, it only has $52.83 million under management and is illiquid.

In the uranium sector, the Canadian listed Uranium Participation Corp holds physical uranium but is performing more like a uranium miner than a tracking fund.

One generally invests in miners because they are often high beta plays on the commodity price. In many cases they are also some of the only ways to invest in relatively illiquid commodity markets. At present commodity prices are falling on aggregate so many related shares are underperforming. I agree that the bearish tone expressed by many is a potential contrary indicator but some evidence of support being found by both the shares and the Continuous Commodity Index would be required to confirm a return to demand dominance.

Diversification is a tool most useful for those seeking to protect wealth. If seeking to build wealth then we have little choice but to choose concentration. As far as I know Donald Coxe recommends 6% in commodities and commodity shares and 6% in gold and gold miners. The rest is in high yielding equities and bonds.