The term commodity has been thrown about lately in news and print, and I often wonder who the target audience is when I hear commodity used in the news. Certainly we could talk about gold being a commodity, but commodities are much more then just gold. The range of traded commodities is large. In fact, if the product came from the earth it has a good change of being a commodity. That means metals are commodities, and they are, but so are crops like coffee, sugar, wheat, barley, corn, etc. Commodities are treated and traded in a fungible manner which means that the coffee you buy is not sold by the farmers brand, it is just coffee. That is how the market treats commodities. There is also the differentiation of commodities between soft and hard. A hard commodity is a term that is given to metals, etc., while a soft commodity is a term given to crops. Investing in commodities requires patients and knowledge.
Investing in Commodities-Market Trends:
Some investors watch the market and look for trends within the market and then use those trends as a semi-quasi guide for investing. That kind of knowledge takes time and experience to develop, but investors have to start somewhere and that somewhere is learning about the commodity markets and the trends that occur therein. Understanding market trends is one of the steps of successfully investing in commodities.
Historical prices: The history of the price of commodities tell a great deal about the market behavior. Sorting out the the normal rise and fall of commodity prices begins by being able to recognize cyclical events within the market. Crops for instance, have planting dates, harvest dates, etc. that occur every year. On the other hand, events that may affect crops do not necessarily happy frequently. Drought, flooding, pests, etc. are all events that do not an a predictable schedule. If we look at the hard commodities such as gold, then we can discover an entirely different set of criteria that may develop into trends. With gold and other precious metals, inflation plays a very large role in the rise and fall of prices. What are some of the precursors to inflation? Political unrest, revolution, natural disasters, and other phenomenon that makes it difficult to buy goods or services. Right now, unemployment plays a large role or is an important trend in the price of precious metals. The historical price of a commodity can tell investors a great deal about how that commodity is behaving as an investment. Ten years ago the price of gold was $500 an ounce, but today, the price of gold is well over $1700 an ounce. The events of the last ten years or maybe even the last twenty years can be tracked and mined for data that reflects the social, global and political trends that may point to how the price of gold will do in the future. Knowing the historical aspects of a market and relating them to the future of the market is also part of investing in commodities.
Political Struggle: Politics is a very powerful tool. How governments get along with each other has an impact on many markets. How people or cultures interact with their government is also an important aspect of commodity trading. Revolution, war, civil uprisings, civil unrest, all have an impact on local and in some cases global economies. Look at the continual fluctuation in the price of crude oil. What are the factors that cause the price of oil to rise and fall. Much has been written about oil when it crests $100 per barrel, but what are the factors that cause it to soar in price? What about consumer trends? If people buy products that are either made from petroleum based ingredients or if they buy automobiles that use a lot of gas, then the demand for oil goes up and so does the cost. Like everything, supply and demand plays a large part in determining the prices of commodities. Looking to those trends that are impacted by supply and demand are key investor trends that help determine whether investing in commodities is a good idea or not.
Changes in Technology: The methods and uses of commodities in production of products such as cell phones, MP3 Players, and other consumer electronics has been partially responsible for driving up the cost of precious metals. Expansion of the global economy has made some not so precious metals rather precious and expensive. But perhaps the best place to look at emerging trends is industry. Changes in industry have caused the price of silver to rise. Since global greenism has become the hot market, industries like solar power have grown and with them the use of precious metals such as silver have grown too. Silver has a high melting temperature, and its use in electrical components is very popular. In fact, it is speculated that long after the US economy rights itself and the price of gold drops down to a more realistic number that the price of silver will continue to remain high. We can look into industries such as Solar Power and see that several difficult factions have gotten on board the solar power wagon. The US government is giving tax initiatives to new home buyers who utilize solar as their principle energy source. Environmental groups are eager for solar power to replace traditional electricity plants. Perhaps the biggest faction to approve of solar power is the consumer base within the United States. All three of these groups are indicators of the why Silver as a commodity is good. But this article is not just about silver, it is about commodities. Learning how to track trends within a specific commodity is important if you are going to be a profitable investor. Know the commodity that you are interested in.
Investing In Commodities- How To begin Investing In Commodities:
Because of the nature of commodities, regardless of whether they are hard of soft, they are an everyday part of our world and lives. As with any investment, it is important to start with an investment plan. Commodities like gold can be used as a hedge against inflation, so part of your investment strategy may be to invest in a hedge against stocks and bond within your portfolio. Determine how much of your investment portfolio should be commodities and how much should be balanced out with funds, stocks, bonds, and other forms of investment.
Soft commodities are often sold as futures which is a promise to buy X amount of the commodity at X date for X price. Because they are bought and sold in the future, the risk is to production or whether the crop can produce what the future contract has agreed to. Another risk to consider is over production where you have agreed to pay for a crop at $40 per ton expecting that the market price will be $60 per ton when your crop is delivered… but everyone and their uncle grew the crop this season and now there is so much of it on the market that it is only selling for $10 per ton. A good example of why research is important.
When ready to actually invest, talk with a few brokers and if buying futures, then use a broker. The pitfall of using a broker is cost, so keep that in mind when you interview brokers. Investing in commodities that are medals is much easier. These can be purchased from a Mint, an online broker or as stocks.
Investing In Commodities – Conclusion:
To recap: Learn your commodity before you being to invest. When you understand the market and how the commodity effects the market and can identify potential pitfalls within the market, then consider investing. Invest via a strategic plan and stick to your plan. Most investment loss can be attributed to a poor plan or to an investor who abandoned their plan. Develop, implement, and follow your investment plan. Use a broker when appropriate but consider that costs incurred while investing reduce profits. Keep costs low. There is a lot of profit available in the commodity markets and learning how to invest in commodities is the first step in reaping those rewards.