YOU’RE reluctant to buy oil since it doubled over the past year and you fear you’ve missed the boat with agricultural commodities after their 38% gain, especially now that governments are talking about cracking down on biofuels. So what will be the next hot commodity?

Goldman Sachs, the investment bank that coined the term Bric (Brazil, Russia, India and China) and was talking about $100 oil when everyone else was stuck at $40, thinks it has found the answer: water.

It has called the commodity the “petroleum for the next century” and says it has been grossly undervalued for years. The story behind it is the same for every other commodity: demand is soaring while supply is tight.

In the United States, water demand has tripled in the past 30 years, while the population has grown just 50%. Globally, water consumption is doubling every 20 years, more than twice population growth.

Expert View

The "petroleum for the next century" has been grossly undervalued for years: demand is soaring while supply is tight

Kathryn Cooper

• More

• Post a comment

Related Links

• Are mid caps good value?

• Six unloved stocks that contrarians would buy now

Factor in the explosive growth in China, which has 21% of the world’s population, but only 7% of its water supply, and you have a problem. As the Chinese get richer and eat more meat, the problem is going to get worse: it takes 15 cubic metres of water to produce 1kg of beef, compared with just 1.5 cubic metres for corn.

Given current trends, it is estimated that by 2025 about a third of the world will not have access to adequate drinking water.

On the flip side, supply is fixed. Only 2.5% of all water is fit for human consumption and around two-thirds of that is locked away in icecaps and glaciers. That percentage is not about to change.

Even if there were enough to go round, piping it to those who need it is getting harder. America desperately needs to upgrade its water infrastructure, a job that will cost between $300 billion (£153 billion) and $1 trillion (two-thirds of which is for distribution pipes and pumps).

An estimated 60% of America’s water main pipes will be classified as substandard by 2020.

And the water supplied is deteriorating. American companies test for nearly 100 known contaminants, and a disturbing number of new compounds are being found - a glass of water could contain aspirin, caffeine, and even animal growth hormones from farm-water run-off.

One solution to the global problem is desalination, which is already popular in the Middle East. It is an expensive solution - 100m gallons of seawater produce just 50m gallons of desalinated water - though costs have fallen three to four times in the past 30 years.

The problem for investors is that the world leader in water and desalination, American giant GE, gets only 2% of its revenues from this area, so it hardly offers pure exposure.

Goldman tips smaller companies such as filtration specialists Clarcor and Pentair. They should benefit from the recent backlash against bottled water and are likely takeover targets as the $425 billion industry consolidates.

Both are listed on the New York Stock Exchange, but with many brokers charging as little to trade American shares as British ones, they are certainly worth a look.

If you’d prefer a fund, iShares, the exchange-traded fund arm of Barclays, recently launched the first water ETF in Europe - the iShares S&P Global Water fund.

More established ETFs listed in New York include the Power-Shares Water Resources Portfolio tracking the Palisade Water index, up nearly 7% over the past year, compared with a drop of 10% in the FTSE 100. Alternatively, the First Trust ISE Water index fund is up 14.5%.

The problem with these index trackers is that they give access to the big listed water companies rather than the smaller ones where the action is. For something more racy, try the offshore Pictet Water fund - although this has barely bucked the down-turn with a fall of 11%, against 17% for the MSCI World index.

Alternatively, private bank Wil-liams de Broë will this autumn launch an exchange-traded fund that will track six offshore water funds, because there is nothing in the UK for its clients.

To me, this dearth of funds suggests a genuine investment opportunity.