Three Different Ways To Investment In Commodities

Tue, Nov 19, 2013

How To Investment In Commodities

After years of steady gains between 2001 and 2008 and again from 2009 to 2011, commodities prices have reversed course.stock market commodities today

Steady declines in the most popular commodity investments since then have sent more and more investors away from commodities.

At this point in the commodity price cycle, however, investors need to realize the turning point in commodities prices is nearing.

That turning point comes when producers of the specific commodities (i.e. a gold mine produces gold) can no longer produce the commodity for a profit.

We’re seeing this point being reached for gold miners. It’s happening to uranium miners. It has already happened to rare earth miners. And if oil prices drop to around $60, it will be happening to oil companies.

Those are the times when commodity investments make truly great investments.

 

Here Are Three Different Best Ways To Invest In Commodities When The Time Is Right:

 

Commodity Investment #1: Commodity Exchange Traded Funds (ETFs)

ETFs make the best commodity investment vehicle for most investors.

They can give you direct access to commodities. They are liquid so they can be sold with a few clicks on your computer during market hours. And they allow you to invest in all kinds of different commodities cheaply and easily.

The real danger is in leverage commodity ETFs.

Take a popular ETF like the VelocityShares 3x Long Silver ETN (USLV). It is meant to track three times the daily price movement of silver.

In the short-term, it does that very well. In the long-term, it doesn’t do it very well at all.

Consider this. Between October 2011 and today silver prices increased 3%. The USLV triple silver ETF actually fell 85% over the same time period.

best way to invest in commodities

This is a great example of the differences among commodity ETFs. The best commodities ETFs to invest in are the simple ones that track the commodity price. The leveraged ones all turn out to be disastrous over time.

Commodity Investment #2: Physical Commodities

Buying and hold physical commodities is exactly what it sounds like. It involves buying the commodity and holding it for sale later.

Investing in physical commodities is very practical (almost advantageous) in some cases. Yet quite impractical and costly in other cases.

Take physical gold bullion for example. This is a common commodity investment for a lot of people. It’s a good one too as insurance against a financial apocalypse.

Gold is sold through a network of coin dealers. It’s a mature market. And the average premium over the spot price of gold for physical gold is usually only about five percent.

As a result, investing in physical gold makes sense. Other physical commodity investments, however, do not make nearly as much sense.

Think of investing in oil. The costs of buying, transporting, and storing oil would be prohibitively high even if you wanted to buy as much as $1 million worth of oil. At current prices that’s about 10,000 barrels of oil. The cost of renting a storage facility would easily outrun any profits that would be made and add significantly to any losses if oil prices decline.

Physical commodity investment is good in some cases like precious metals where the value is high and storage is easy. It does not in other commodity investments like oil or grain. The commodity ETFs are a much better option for most investors.

Commodity Investment #3: Futures Contracts

Commodity futures contracts are a great way to get leverage to commodity price moves.

A futures contract is the obligation to either buy or sell a pre-specified commodity at a certain place and time in the future.

Futures allow you to go long (a bet on a price rise) or go short (a bet against a price drop) on virtually any commodity.

The most common commodity futures traded on the Chicago Mercantile Exchange are for gold, silver, oil, corn, and wheat.

Most of these contracts are traded among financial traders. So they all just buy or sell to cover their positions before any physical commodities have to be delivered.

I made commodities futures the #3 commodity investment featured here because they are largely impractical for most investors. They are very volatile. Tens of thousands of dollars can be made or lost in a few minutes time.  And they are often only useful for very Short-Term Commodity Investments.

These are three of the easiest  Ways To Invest In Commodities today.

Right now most commodities are just not attractive investments at all.

That puts potential commodities in a very tough spot. Rest assured it’s a position that will eventually pay off very big.

Commodity prices are dropping across the board. The prices gold, silver, oil, rare earths, and other popular commodity investment sectors have been in a downtrend since 2011.

Contrarian Commodities have basically been in a bear market for about two years now.

That bear market will end eventually. And when it does the three safest ways to invest in commodities detailed above will earn some great returns.

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