Commodity Investing
Commodity investing may not be the first thing that comes to mind for most people when they think about investing. Commodities like oil, zinc, sugar, rice, etc may not sound as attractive as some of the latest tech stock. But this asset class has proven to do extremely well over time.
To be a successful investor you have to understand commodities. Commodities are an essential part of the market and the economy. A diversified portfolio must include commodities.
Commodity investing offer extraordinary opportunities during commodity bull markets. Commodities also offer a hedge against inflation and safety from economic and political uncertainty. Huge profits can be made by those who understand the supply and demand situation of things like sugar, natural gas, lead, crude oil and wheat
Sugar went up 4500% from top to bottom during the last bull market during the 1970s. Lead went up 800% in 6 years only from 2000 to 2006. Oil went up over 1100% during the last bull market in the 1970s and it has gone up 584% between 2000 and 2008. Many commodities outperform the stock market by far when shortages develop.
Commodities are in many respects easier to understand than stocks. As a matter of fact commodities are quite dumb. Commodities do not have management, regulations, and unions to worry about. Commodities dont care about what politicians and central bankers say. Commodities only respond to supply and demand. If demand outstrip supply price goes up. It is as simple as that!
Three simple strategies to advantage of rising commodity prices
1. Buy the raw commodities You can buy an individual commodities or a basket of commodities. Exchange traded funds (ETFs) and Exchange traded notes (ETNs) are funds traded on a stock exchange and tracks the price commodities. You can also buy commodity futures contracts through a futures commission merchant (FCM) on a commodity futures exchange.
2. Invest in commodity producers or companies servicing commodity producers Mining companies, agricultural companies, and Potash producers do well when commodity prices rise. Companies selling equipment or material to commodity producers also benefit from rising commodity prices.
3. Invest in countries that are resource rich Countries that produce commodities usually do well during a commodity bull market. Resource rich countries economies do well during these cycles. They export more and their currencies appreciate in value.
Stocks and Commodities have historically had a negative correlation. When stocks go up commodities have gone down and when commodities go down stocks have gone up. This cycle has been repeating itself over and over again. The commodity bull market cycle lasts 17-18 years on average.
People frequently hear myths and rumors that commodity investing is very risky, complex, and dangerous. This is flat out false. Commodity investing is not more difficult than stock investing and it is certainly not more risky. Stocks can go to zero but I have never seen a commodity like, zinc, gold, oil, or wheat go to zero.
