Crude oil, natural gas, copper, aluminum, nickel, zinc, gold, silver, platinum, palladium, thermal coal,metallurgical coal, iron ore, corn, wheat, soybeans, rice, cocoa, cotton, sugar, and coffee – these are all examples of commodities in which you can invest.
You could buy a barrel of crude oil, you could buy futures for a barrel of crude oil, or you could buy into a fund that holds some of these. Finally, you could buy an index fund that tracks commodities futures indices – such as the Dow Jones AIG Commodity Index which tracks the futures price of 19 different commodities, including energy, livestock, grains, industrial metals, precious metals and “soft” commodities.
But why would you, why should you care about them?
Top Stock Analyst article 13 High-Yielding Commodity Stocks for 2013 author Aaron Levitt claims that:
“Interest in this asset class has exploded as individual retail investors have discovered commodities’ vast benefits, like low correlation to equities and bonds, inflation-fighting capabilities and their ability to profit from some of the world’s fastest-growing emerging markets. “
Here are three reasons to consider owing commodities.
Diversification
According to the Pimco Educational site section article Why Invest in Commodities:
”Commodities are ‘real assets’, unlike stocks and bonds, which are ‘financial assets’. Commodities, therefore, tend to react to changing economic fundamentals in ways that are different from traditional financial assets.”
They provide diversification in your portfolio so that, if stocks go down, maybe your commodity holdings will go the other way.
Since they are real assets and not just paper, they also may hold their own in a down cycle caused by such things as another financial crisis or war or natural disasters.
Inflationary protection.
Because the prices of commodities rise with rising prices elsewhere, they are considered somewhat of a hedge against inflation.
Profit.
You might benefit from rising prices due to emerging markets growth. Increasing demand for commodities will come from places like China and India as people in those countries develop manufacturing, infrastructure and an addiction to the Western lifestyle.
Why wouldn’t you want to invest in commodities?
Commodities carry their own risks and can be very volatile, if you invest directly in the commodity (such as buying an once of gold or buy futures in copper or corn. In fact, investing in commodities futures may require you to be accredited (proving you can afford to lose the money).
In fact the New York Times article Stepping Carefully in Commodities Markets author John F. Wasik says in 2011:
“Subject to supply and demand and the vagaries of futures exchanges, they are among the riskiest short-term investments. Trading them is best left to professionals.”
As far back as October 2011, the Wall Street Journal made a case against investing in commodities (note that there has been a run up in many commodity prices since that time!) saying:
“But there’s a case against commodities, too: the human tendency to feed our appetites ever more efficiently, which periodically undercuts commodity prices and in extreme cases has even wiped out entire markets.”
They site natural gas (which has been undergoing a glut in supply during recent years) as an example.
Still, there are way’s to invest that don’t require accreditation and aren’t as risky.
How can you invest in commodities?
According to Jarad Cummans, author of Jim Rogers Says: Buy Commodities Now, Or You’ll Hate Yourself Later you can buy actual bullion, or physically backed Exchange Traded Funds such as GLD or SLV or ETFs like MOO.
You can buy shares in companies that deal with commodities. Top Stock Analyst author Aaron Levitt has several recommendations of ETFS and companies to consider in his article “High Yielding Commodity Stocks for 2013. Among them are companies like John Deere along with different mining, timber and natural resource companies.
Do I invest in commodities?
While I don’t invest directly in commodities or futures, I do own stock in companies that deal with them. I have some oil company stock and some stock from an aluminum company and one from a copper company. As we progress through 2013, and if the commodities look like a value, I will consider adding additional components, as I believe they may help balance our portfolio and help keep us afloat in what I think will be an inflationary period in the not too distant future.
These investments are part of a diversified and asset class balanced portfolio.
Disclaimer: I am not an investment professional, please consult yours before taking action based on information in this post!
What is your experience with commodity investing?
{ 2 comments… read them below or add one }
I use to trade crude oil and the euro. I like commodities because they allow you to leverage a great amount and the rewards are astronomical. However I wouldn’t recommend investing in commodities until you are debt free because as the rewards are potentially great you can also lose more than you invested.
Marvin,
I don’t think anyone should be investing in the market unless they are debt free and have an emergency fund. Also, I believe you can put money into stocks of companies that deal in commodities without using leverage – and thereby limit some of that risk.