Investing in commodities can be complicated since it involves knowledge that the average person can not get or learn in a short perid of time. What are commodities? Commodities are things you eat like rice, things you use to make stuff like iron ore, and things you wear for jewelry like gold. Many factors affect the price of commodities and it’s likely that most of these factors fall outside the thoughts of the average investor.
For example, how many people know that the world price of sugar is highly affected by how well of a crop that Brazil turns out each year? If they have a lot of sugar, and the world market is flooded knocking down prices, Brazil will keep their sugar and turn it into ethanol (much more efficient that the crap ethanol we Americans make from corn). If the crop is poor worldwide, and prices rise due to lack of supply, then Brazil will sell their crop on the world market. Bottom line – how will the average investor track that? Will they order crop reports and call farmers on a weekly basis for updates?
Famous investor Jim Rogers has said that in the past, it would have been much more profitable to buy the commodity than the stocks related to that commodity. I haven’t crunched the data so I will take him at his word as commodities investing is an area he knows quite well. Nonetheless, adding commodity-related stocks adds another wrinkle analyzing commodities.
Furthermore, many studies have shown that adding commodities makes for a good diversifier, especially in a world where stocks markets from many countries are moving up and down together (i.e. more correlated) making diversification more difficult these days.
Note of Caution: with some clients asking us more frequently now, we won’t even discuss junior mining companies (the companies in exploration stage of looking for commodities – hit or miss). This area requires on the ground research and should not be attempted from just reading drilling results (especially if you are not a geologist!).
Now that I’ve tried to warn you enough, you can ask: “How can I get exposure to commodities?” There are various ways including a couple mentioned above. Here is a non-exhaustive list:
- Futures contracts – for the major grains, hogs, live cattle, sugar, cocoa, coffee, orange juice, metals like copper, precious metals like gold and many more
- ETF/ETN – exchange traded funds (ETF) are available also for many of the same commodities listed above
- Stocks of Commodity producing/mining companies – agriculture, metals, etc.
- Stocks of junior mining/exploration companies – gold, silver, potash, nickel, etc.
- Commodity-Linked Notes offered by brokers and even some offered by a bank
We pay for research and recommendations for companies in this area as we confess that we are not geologists, and since we follow the same advice that we give, we do not invest in areas without expertise unless we pay for someone else’s good expertise.
Bottom line – if you venture into commodity investing, which can be a good thing, don’t go in blind. Have a plan and get good advice. If you are considering futures, which is an area that I do not know well and am smart enough to avoid (due to my lack of expertise), then get help. Futures can make AND LOSE you a lot of money fast.
If you’d like more local advice, feel free to call our office – 781-393-0021 or send us a Quick Contact. We have a team of professionals that can help with your situation.
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Please see my disclaimer page about advice on this site – thanks!