Commodities For Dummies
Overview
Add another dimension to your portfolio with commodities
Commodities For Dummies gives you a complete overview of the basics of investing in commodities. Step-by-step explanations, plus the most up-to-date market information and global events, make it easy to invest in the stuff the world is made of. This book helps you identify the most valuable commodities to add to your portfolio, use commodities as a safe haven in shifting economic times, and come out on top. Learn quick, with real-life examples, expert advice, and basic explanations to get you involved in energy, agriculture, and metals. Pick up this book, and you’ll be ready to select the right investment vehicles for you, manage risk, and reap the benefits of investing in commodities—the Dummies way.
- Get a crash course in the basics of global commodity trading and investing
- Discover how recent global events have impacted commodity prices and supply chains
- Find the right balance of commodities for your portfolio—in any market weather
- Understand the importance of ESG and renewables in the commodity investing landscape
This is the perfect Dummies guide for investors who have a good grasp of the basics and want to continue to diversify their portfolio with—you guessed it—commodities.
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About The Author
Amine Bouchentouf is Managing Director of Commodities Investors LLC, an institutional investment advisory firm specialized in natural resources. He graduated with a degree in Economics from Middlebury College and has appeared in media around the world, including Bloomberg News, Wall Street Journal, and Reuters.
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commodities for dummies
CHEAT SHEET
The major commodities exchanges trade specific commodities worldwide, and the main regulatory organizations provide information and enforce codes to protect commodities investors. When investing in commodities, use guidelines and advice from the experts to lower your risks.Matching commodities with commodity exchangesThe 20th century saw a proliferation of commodity exchanges around the world, with many based in the money centers of New York and Chicago.
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Commodities
As the global population increases and emerging countries industrialize, the demand for energy commodities will rise throughout the first quarter of the 21st century. The Energy Information Administration (EIA) anticipates that global demand for energy products will increase by more than 70 percent between 2003 and 2030.
Commodities
In the futures markets, individuals, institutions, and sometimes governments transact with each other in commodities for price-hedging and speculating purposes, trying to make (or save) money.
An airline company, for instance, may want to use futures to enter into an agreement with a fuel company to buy a fixed amount of jet fuel for a fixed price for a fixed period of time.
Another route you can take to get exposure to commodities is to buy stocks of commodity companies. These companies are generally involved in the production, transformation, or distribution of various commodities.
This route is perhaps the most indirect way of accessing the commodity markets because, in buying a company’s stock, you’re getting exposure not only to the performance of the underlying commodity that the company is involved in, but also other factors, such as the company’s management skills, creditworthiness, and ability to generate cash flow and minimize expenses.
If you think delving into commodity derivatives isn’t for you, you can access the commodity markets through funds. If you’ve invested before, you may be familiar with these two investment vehicles.
Commodity mutual funds
Commodity mutual funds are exactly like average, run-of-the-mill mutual funds, except that they focus specifically on investing in commodities.
Commodities have a reputation for being a risky asset. Many investors are simply scared of investing in this asset class. This fear is largely unfounded because, statistically, there’s no greater risk in investing in commodities than there is in investing in stocks.
For whatever reason, investors have shunned this asset class in favor of what they think are more “prudent” investments, such as stocks.
Commodities
You invest in commodities because you’ve realized that it’s better to have your money working for you than to have it sit in a bank account earning so little interest that you end up losing money when you factor in inflation. Most people end up working for their money all their lives, and they get stuck in a vicious cycle where they become servants to money.
Commodities
The 21st century is going to experience the largest population growth in the history of humankind, which will lead to growth in commodities. The United Nations (UN) estimates that the world will add a little less than 1 billion people during each of the first five decades of the 21st century.
The global population will grow to about 9 billion people by 2050 (as of 2010, approximately 6.
Before the beginning of the 20th century, coal was truly the king of commodities. Coal was the dominant source of energy during the tumultuous Industrial Revolution. People still often associate the Industrial Revolution with images of coal mines.
Coal is now used primarily for electricity generation (steam coal) and steel manufacturing (metallurgical coal).
If you want to stay grounded while still getting exposure to coffee commodities in your portfolio, try investing in companies that specialize in running gourmet coffee shops.
In most metropolitan areas, you can’t walk a block without spotting two or three gourmet coffee shops, especially Starbucks. Coffee shops are nothing new — Arabian coffee shops sprang up in the Middle East as early as the 15th century.
Commodities
The coffee commodity futures markets determine the future price of coffee and, more importantly, protect producers and purchasers of coffee from wild price swings. In addition to hedging opportunities, the coffee futures markets allow individual investors to profit from coffee price variations.
The most liquid coffee futures contract is available on the Intercontinental Exchange (ICE), which assumed tradability of the coffee contract when it acquired the New York Board of Trade (NYBOT).
The major commodities exchanges trade specific commodities worldwide, and the main regulatory organizations provide information and enforce codes to protect commodities investors. When investing in commodities, use guidelines and advice from the experts to lower your risks.Matching commodities with commodity exchangesThe 20th century saw a proliferation of commodity exchanges around the world, with many based in the money centers of New York and Chicago.
Commodities
As a commodities investor, knowing which countries have large crude oil deposits is an important part of your investment strategy. As demand for crude oil increases, countries that have large deposits of this natural resource stand to benefit tremendously. One way to benefit from this trend is to invest in indigenous countries and companies with large reserves of crude oil.
Commodities
The two most critical questions to ask yourself before getting started in commodities are the following: What commodity should I invest in? How do I invest in it? Means of investing in commodities include managed funds and the physical commodities.
Commodities managed funds
Sometimes it’s just easier to have someone else manage your investments for you.
Commodities
Building wealth through investing in commodities takes a lot of time, effort, and discipline — unlike winning the lottery or getting a large inheritance. Achieving your financial goals takes a conscious and systematic effort. Of course, the first part is identifying and establishing your financial goals.
These goals may be as diverse as amassing enough money to retire by age 50 and travel the world, to gathering enough money to pay for college, or to making enough money to pass on to your children or grandchildren.
Commodities
Risk is perhaps the single greatest enemy you face as an investor in commodities. How wonderful would life be if you could have guaranteed returns without risk? Because that’s not possible (and has never been possible), you have to find how to manage, tame, and minimize risk.
Your risk tolerance depends on a number of factors that are unique to you as an individual.
Commodities
Taxes have a direct impact on how much of the assets that you have invested in commodities you get to keep at the end of the day. You must understand the implications that taxes can have on your portfolio.
How much you pay in taxes is based on your tax bracket.
Annual Taxable Income
Tax Level
$0–$8,375
10%
$8,375–$34,000
15%
$34,000–$82,400
25%
$82,400–$171,850
28%
$171,850–$373,650
33%
$373,650+
35%
This tax rate schedule is known as Schedule X, and it applies to you if you’re filing your tax return as a single person.
Commodities
One way to identify where the commodity markets are heading is by watching certain market indicators. These key metrics provide insight into what the markets are doing and help you design and calibrate an investment strategy based on the market fundamentals.
London Gold Fix
Gold is a special commodity because it’s one of the only commodities that has a monetary role.
Commodities
The commodity waters can be perilous at times, and knowing how to navigate them is crucial. Keeping your eye on where the markets are heading will help you develop a winning investment strategy. Data compiled by the U.S. government is free and easy to access.
Consumer Price Index
The Consumer Price Index (CPI), compiled by the Bureau of Labor Statistics (BLS), is a statistically weighted average of a basket of goods and services purchased by consumers around the country.
One of the driving forces behind the dynamic commodities markets are emerging markets, both from the demand side and also in terms of supply. Keep an eye on Brazil and China, two countries that tend to move markets.
Brazil: A powerhouse in the commodities markets, Brazil has been blessed with an abundance of natural resources.
Commodities are cyclical in nature. Returns on commodity investments aren’t generated in a vacuum — they’re influenced by a number of economic forces. In other words, the performance of commodities, like that of other major asset classes, is tied to general economic conditions. Because economies move in cycles, constantly alternating between expansions and recessions, commodities react according to the current economic phase.
The history of commodities tells the story of civilization itself. Ever since man first appeared on earth, his existence has been defined by a perpetual and brutal quest for control over the world’s natural resources. Civilizations rise and fall, nations prosper and perish, and societies survive and subside based on their ability to harness energy, develop metals, and cultivate agricultural products — in short, based on their capacity to control commodities.
Commodities
The whole reason master-limited partnerships (MLPs) exist in commodities markets is to distribute all available cash back to the MLP unit holders, which has to be done on a quarterly basis. These factors determine how much cash is distributed to each investor:
How many units the investors hold
The incentive distribution rights (IDRs) created for the general partner (GP)
The difference between distributable and discretionary cash flow
The GP is responsible for distributing cash back to the limited partners (LPs) proportionally to their holdings.
Commodities
Measuring natural gas can be confusing because multiple measurement methods exist for the commodity. These measurements basically boil down to how much physical natural gas there is and how much energy the natural gas generates.
Whereas crude oil is measured in barrels (each barrel contains 42 gallons of oil), natural gas is measured in cubic feet.
If you’re interested in investing in companies that are involved in the production, transformation, and distribution of commodities, one of the best ways to do so is to invest in a master limited partnership (MLP). MLPs are a great investment because of their tax advantage and high cash payouts.
MLPs are public entities that trade on public exchanges.
If you’re looking to invest in commodity mutual funds, you can choose from two main funds: the PIMCO Commodity Real Return Strategy Fund and the Oppenheimer Real Asset Fund.
To find out more about commodity mutual funds, a useful tool is the Morningstar website. This all-around excellent resource for investors includes lots of information related to commodity mutual funds, such as the latest news, updates, load charges, expense ratios, and other key data.
Every option in the commodities markets has different characteristics, depending on how you want to exercise the option and what action you want to conduct when it’s exercised. Put simply, you can use options that allow you to either buy or sell an underlying security. You can further specify at which point you want to exercise the options agreement.
Commodity options traders have their own language. Options contracts give you the option to buy futures contracts for commodities such as wheat and zinc. When talking about options, you need to know certain terms:
Premium: The price you actually pay for the option. If you don’t exercise your option, the only money you lose is the premium you paid for the contract in the first place.
Understanding commodity options can be challenging because they’re, in fact, derivatives used to trade other derivatives (futures contracts). So here’s an example that applies the concept of options to a real-world situation.
You walk into a car dealership and see the car of your dreams. Unfortunately, it costs $100,000, and you can’t spend that amount of money on a car right now.
Your trading account is your link to the commodity exchange. The broker’s trading platform gives you access to the exchange’s main products, such as futures contracts, options on futures, and other derivative products. Because the products traded on commodity exchanges are fairly sophisticated financial instruments, you need to specify a number of parameters to purchase the product you want.
Another way you can get access to the commodities futures markets is to join a commodity pool. As its name suggests, a commodity pool is a pool of funds that trades in the commodities futures markets. The commodity pool is managed and operated by a designated commodity pool operator (CPO), who is licensed with the National Futures Association and registered with the Commodity Futures Trading Commission.
If you’re interested in investing in commodities through the futures markets or on a commodity exchange, getting the help of a trained professional to guide you down this path is always a good idea.
One option is to hire the services of a commodity trading advisor, or CTA. The CTA is like a traditional stockbroker who specializes in the futures markets.
Commodities
In the era after the 2008 Global Financial Crisis (GFC), the importance and responsibilities of market regulators have grown exponentially. The GFC exposed many deficiencies in the way markets and market participants operate, so frequently consulting with regulators has become a necessity for any risk-averse market participant.
Commodities
You need to be familiar with a couple technical terms related to movements in the commodity futures markets if you want to successfully trade futures contracts. (Even by Wall Street standards, these terms are kind of out there.)
Contango in commodity futures
Futures markets, by definition, are predicated on the future price of a commodity.
Commodities
Crude oil is undoubtedly the king of commodities, in both its production value and its importance to the global economy. Crude oil is the most-traded nonfinancial commodity in the world today, and it supplies 40 percent of the world’s total energy needs — more than any other single commodity. Since 2006, the importance of crude oil has only increased.
The Arab Oil Embargo of 1973 underscored the importance of crude oil as a commodity in the global economy. During that year, the Arab members of the Organization of Petroleum Exporting Countries (OPEC) placed an embargo on crude oil shipments to Western countries.
Within a matter of weeks, the price of crude oil skyrocketed by 400 percent, and a number of industrialized nations were thrown into recessions, experiencing high inflation and high unemployment for a number of years thereafter.
Commodities
You need to be bullish on natural gas commodities during times of economic growth. Demand for natural gas rises from commercial users like schools, hospitals, restaurants, movie theaters, malls, and office buildings during times of increasing economic activity.
About 40 percent of the energy consumed by commercial users comes from natural gas, accounting for about 15 percent of total natural gas consumption.
Commodities
In the era following the 2008 credit crisis, a more acute risk emerged for commodities: the sovereign government risk. This type of risk is more important than other types of risks because it involves the balance sheet of sovereign governments.
During the financial crisis, banks were in a position to bail out consumers; when banks started to fail, governments began to bail out the banks.
Commodities
What started as the bursting of the real estate bubble in the United States caused a chain reaction disrupting commodity prices and threatening the very foundations of the global economic system.
The bursting of the real estate bubble had disastrous consequences in the U.S. because many consumers and households depended on stable and high real estate prices for their well-being.
Commodities
In recent years, offshore drilling has generated a lot of interest among commodities investors, and a flurry of activity has been taking place in this sector as oil on land becomes scarcer. Some of the leading companies engaged in the offshore drilling business include the following:
Diamond Offshore Drilling (NYSE: DO): With 50 offshore rigs, Diamond Offshore (DO) is one of the dominant players in the offshore drilling industry.
Commodities
Electricity is now a tradable commodity, but Benjamin Frankly couldn’t have imagined that his kite experiment would come to that. His experimentation paved the way for developments in electricity, which is now a necessity of modern life.
Have you ever wondered where the electricity that allows you to watch TV, use your air conditioner, or power your computer comes from?
Commodities
The commodity crude oil by itself doesn’t have many useful applications — it needs to be refined into consumable products such as gasoline and jet fuel. Refineries are a critical link in the crude oil supply chain because, after crude oil is discovered, that oil needs to be transformed into products before it’s sent to consumers.
Commodities
Investing in coal as well as nuclear power is one way to invest in electricity commodities. But you can invest directly in the power industry in several other ways as well.
The most direct way of investing in electricity is . . . to buy it! The Chicago Mercantile Exchange (CME) offers a futures contract that tracks the price of electricity as administered by PJM Interconnection.
Commodities
You probably get a letter from them every month, but you may have never given too much thought about the commodities investment opportunities that they present. “They” would be, of course, the electric utilities. Utilities are the companies responsible for providing electricity to millions of folks in the United States and around the world.
A large part of the exploration and production activity for oil commodities takes place on dry land. While most industry insiders agree that most onshore oil wells have been discovered, but you can still benefit by investing in companies that are involved in the exploitation and production of onshore oil fields.
Commodities
One way to play the commodity markets is to invest in the companies involved in the production, transformation, and distribution of the world’s most important energy commodities. The global crude oil supply chain is long and convoluted, and these industries move in cycles, so identifying who does what allows you to develop a targeted investment strategy.
The offshore drilling business is a technology-heavy industry, and if you want to invest in companies that function in this commodity space, you want to be familiar with some of the associated terminology.
Because offshore drilling activity may take place in unforgiving locations, companies have to deploy specific vessels for specific drilling projects.
Commodities
Identifying the countries with large crude oil reserves is important, but it’s only a starting point as you begin investing in commodities. To determine which countries are exploiting these reserves adequately, you should look at another important metric: actual production. Having large reserves is meaningless if a country isn’t tapping those reserves to produce oil.
Commodities
If you are planning to invest in oil companies to get exposure to energy commodities, there is a vast amount of information available about these companies in the documents that are required by the federal government.
The Securities and Exchange Commission (SEC) requires oil companies, like all publicly traded companies in the United States, to file annual and quarterly reports.
The United States tops the list of oil consumers and has been the single largest consumer of the commodity for the last 25 years. Although a lot of folks pay attention to the demand increase from China and India, most of the demand for crude oil (and the resulting price pressures) still comes from the United States.
Commodities
Oil companies get a bad rap. Whatever you may think of them, they make for a great investment in commodities. Oil companies are responsible for bringing precious energy products to consumers, and for this service they’re compensated — handsomely. Oil companies are for-profit companies that are run for the benefit of their shareholders.
Commodities
The commodity that’s currently the biggest component of the renewable energy industry is biomass, accounting for 53 percent of total production estimates. Scientifically speaking, biomass energy is produced by processing common wastes and transforming them into renewable energy through a biochemical conversion process.
Commodities
When most people think of nuclear power, they tend to think of nuclear weapons and mushroom clouds, not energy and commodities. However, nuclear power has an important civilian role, too. Civilian and commercial nuclear power is an integral part of the global energy supply chain and is a valuable energy source for residential, commercial, and industrial consumers worldwide.
If crude oil is the king of commodities, natural gas is sometimes said to be the queen. Although crude oil accounts for about 40 percent of total energy consumed in the United States (the biggest energy market in the world), approximately 25 percent of energy consumption comes from natural gas.
Natural gas is therefore an important source of energy both in the United States and around the world, and it can offer tremendous moneymaking opportunities.
Commodities
Solar power currently accounts for only 1 percent of total renewable energy sources, but it’s one of the fastest-growing areas in the commodities arena. Governments around the world are in the process of announcing massive infrastructure spending programs dedicated to harnessing the sun’s power and turning it into electricity and other forms of energy.
Commodities
Because uranium isn’t a widely tradable commodity, the best way to profit from nuclear power is to invest in companies that specialize in the mining, processing, and distribution of uranium for civilian nuclear purposes. These companies are good options in this sector:
Cameco Corporation (NYSE: CCJ): Cameco is the marquee name in the uranium mining space.
Commodities
Wind energy is another renewable resource that’s getting increasing attention from commodities investors. Energy is generated by huge wind machines (similar to traditional windmills), which are placed side by side in wind farms.
The challenge to wind energy is that it’s dependant on the wind, a very unpredictable natural phenomenon.
Commodities
Because ETFs are now in a position to offer easy access to commodities, and because the number and type of commodities they cover has expanded, you can benefit from seeing which ETFs are out there to help with your investment needs.
PowerShares DB Commodity Index
The DB Commodity Index (NYSE: DBC) was the first ETF of its kind to track a commodity index.
Commodities
Exchange Traded Funds (ETFs) let the weekend investor access investment products that were once the purview of expert industry insiders and professional commodity traders. ETFs can provide easy access to agricultural commodities exposure in your investment portfolio.
PowerShares DB Agriculture Long Index
Agriculture has traditionally been an extremely difficult commodity subasset class to get exposure to, reserved for investors who owned farms or expert agricultural futures traders on one of the exchanges.
Commodities
Exchange Traded Funds (ETFs) are now in a position to offer easy access to commodities. With ETFs, you can now access investment products that were once the purview of expert industry insiders and professional commodity traders.
United States Oil
If you’re looking for exposure to the oil markets without going through futures contracts, the United States Oil Fund (NYSE: USO) is an alternative.
Commodities
With Exchange Traded Funds (ETFs), you can now access investment products that were once the purview of expert industry insiders and professional commodity traders. ETFs offer easy access to commodities.
SPDR Gold Shares
The SPDR Gold Shares ETF (NYSE: GLD) is one of the most popular ETFs ever created, not just as a commodity product, but also as an ETF product in general.
Commodities
Investing in commodities through companies that process natural gas is a positive investment choice because it offers you exposure to this market through the expertise and experience of industry professionals, without the volatility of the futures market. Some natural gas companies are involved in the production of natural gas fields; others are responsible for delivering natural gas directly to consumers.
Investing is all about managing risk, and here are two ways to approach risk management: (1) According to uber-investor Warren Buffet, Rule #1 of investing: Never lose money. Rule #2 of investing: Never forget rule #1; (2) If you focus on protecting your downside, the upside will take care of itself. Here are a few key risk variables you should be monitoring constantly:
Volatility: Volatility is the way that investors measure price variation and fluctuation of a given security over time.
Commodities
Although the futures markets offer the most direct investment gateway to the commodities markets, the equity markets also offer access to these raw materials. You can invest in companies that specialize in the production, transformation, and distribution of these natural resources. If you’re a stock investor familiar with the equity markets, this may be a good route for you to access the commodities markets.
Commodities
Metallurgy and civilization go hand in hand. Man’s ability to form metals into useful commodities enabled him to develop modern society and civilization. As a matter of fact, human prehistory is classified by using a three-age system based on man’s ability to control metals: the Stone Age, the Bronze Age, and the Iron Age.
Commodities
As with a number of other commodities, coffee production is dominated by a handful of countries. Brazil has historically been the top producer of coffee in the world and has held this position for several decades. Traditionally, Colombia has held the number two spot, but it’s lost that position to up-and-comers such as Vietnam and Indonesia.
Commodities
The global warming movement has changed the energy sector of the commodities market, increasing reliance on renewable energy sources over fossil fuel sources. Scientifically speaking, global warming is the increase in the earth’s temperature in surface and near-surface air and oceans due to increased greenhouse gas emissions from man-made activities such as the burning of fossil fuels.
Commodities
The global warming movement has raised some serious issues and attracted the attention of investors, corporations, and individuals who invest in commodities. Perhaps the most vocal and high-profile figure in the environmentalist movement is Al Gore, former vice president of the United States.
Already a major proponent of environmental issues as vice president, Gore continued his campaigning for environmental causes when his term ended in 2000.
Gold, like most metal commodities, is measured and weighed in troy ounces. One troy ounce is the equivalent of 31.10 grams. (Despite the common misperception, the troy ounce does not take its name from the mythic ancient Greek city of Troy. It’s named after the French town of Troyes, which was an important center of trade and commerce with a thriving precious metals market during the Middle Ages.
Agricultural commodities are usually overshadowed by energy and metal commodities. Recently, however, investors have been eyeing agricultural commodities as traders become aware of the enormous importance of these commodities from both a market and investment perspective. Wheat shortages in 2009–2010 and the subsequent food riots they caused globally shone a spotlight on this segment of the market.
Commodities
One group who trades commodities in the futures market is commercial producers and consumers of commodities who use the futures markets to stabilize either their costs (in the case of consumers) or their revenues (in the case of producers). They take advantage of the futures markets’ liquidity and leverage to implement their trading strategies.
Commodities
Residential use of natural gas accounts for almost a quarter of total consumption of the commodity. A large portion of homes in the United States, as well as other countries, use natural gas for both their cooking and heating needs — the two largest applications of natural gas in the home.
About 70 percent of households in the United States have natural gas ovens in the kitchen.
Commodities
Another great way to capitalize on oil profits is to invest in an emerging market fund that invests in commodities in countries that both sit on large deposits of crude oil and have the infrastructure in place to export crude oil.
A country may have large deposits of crude oil, but it isn’t necessarily able to produce and export crude oil for a profit.
Have you ever picked up the newspaper and read that commodity prices (most likely crude oil) reached a new high? Have you ever asked yourself how these prices are determined? Well, they’re determined on an exchange.
The global benchmark for crude oil prices is a type of crude traded on the CME/NYMEX, called West Texas Intermediate (WTI).
One of the downsides of investing in commodity Exchange-Traded Funds (ETFs) is that they can be fairly volatile because they track derivative instruments that trade in the futures markets. A downside of the DBC specifically is that it tracks a basket of only six commodities. However, more commodity ETFs are in the pipeline that will offer greater diversification benefits.
Commodities
As with most aspects of commodities, tanker spot rates and fixed rates, which provide the bulk of a shipping company’s revenue stream, are highly cyclical. It’s not extraordinary for shipping rates to fluctuate by 60 or 70 percent on a daily basis.
So how do you protect yourself from these extreme price volatilities?
Commodities
Many investors buy on hype; they hear a certain commodity mentioned in the press, and they buy just because everyone else is buying. Buying on impulse is one of the most detrimental habits you can develop as an investor. Before you put your money into anything, you need to find out as much as possible about this potential investment.
Commodities
With so many commodities indexes to choose from, how do you decide which one to follow? Generally, the S&P Goldman Sachs Commodity Index (S&P GSCI) is the most tracked index in the market — it has the most funds following, or tracking, its performance.
As of 2010, more than $85 billion in assets tracked its performance, and this number is growing monthly.
Commodities
Here’s some good news for commodities investors: A new wave of industrialization is taking place in the 21st century, and it may be the most important one in history. This wave is transforming a large number of developing countries into more industrialized countries, and raw materials are fueling this transformation.
Two commodities futures contracts exist for the cattle trader and investor: the live cattle and the feeder cattle contracts, which both trade on the Chicago Mercantile Exchange (CME).
Live cattle futures
The live cattle futures contract, traded on the CME, is unique because it was the first contract the CME launched to track a commodity that’s actually alive.
A common way to invest in commodities is through a mutual fund. It may be the simplest way for you to get involved in the commodities markets because you’re relying on a trained professional to do the investing on your behalf.
A mutual fund is a fund managed by an investment professional for the benefit of the fund investors.
Corn, like other commodities such as crude oil and coffee, comes in different qualities. The most important types of corn you should be familiar with are high-grade number 2 and number 3 yellow corn, which are both traded in the futures markets.
The most direct way of investing in corn is by going through the futures markets.
For a number of reasons — environmental, political, geopolitical — there’s a strong push to move away from fossil fuel commodities as the main sources of energy and toward alternative energy sources such as nuclear, wind, and solar. As a result, these alternative sources can give you some solid moneymaking opportunities.
Unlike other commodities that are dominated by single producers — Saudi Arabia and oil, the Ivory Coast and cocoa, Russia and palladium — no one country dominates wheat production. As a matter of fact, the major wheat producers are a surprisingly eclectic group. The advanced developing countries of China and India are the two largest producers, while industrial countries like Canada and Germany also boast significant wheat production capabilities.
You can invest through a commodity index by using a number of methods. You can choose from five widely followed commodity indexes, and each one is tracked and traded differently.
Consider a few ways you can invest through a commodity index:
Own the futures contracts. One of the most direct ways of tracking the performance of an index is to own the contracts the index tracks.
Commodities
The price of crude oil as a commodity skyrocketed during the first decade of the 21st century. If this period is any indication of what’s in store for oil, you definitely want to develop a winning game plan to take advantage of this trend.
That said, crude remains a volatile commodity that’s subject to external market forces.
Commodities
One of the most common questions from investors is, “How much of my portfolio should I have in commodities?” The answer is usually simple: It depends. To answer that question, you have to take into account a number of factors to determine how much capital to dedicate to commodities.
If you’re new to commodities, you should start out with a relatively modest amount — anywhere between 3 and 5 percent of your portfolio — to see how comfortable you feel with this new member of your financial family.
One of the biggest trends in the global investment game in the beginning of the 21st century is the increasing popularity of commodities in investor portfolios. Driven by high commodity prices, many investors are looking for ways to profit in this sector.
Commodity exchanges are becoming popular vehicles through which investors access the commodity markets.
Commodities
The commodity futures market is divided into two segments: one that’s regulated and another one that’s unregulated. Trading in the regulated portion of the futures market is done through designated commodity futures exchanges such as the New York Board of Trade (NYBOT) — now part of the Intercontinental Exchange (ICE) — and the Chicago Mercantile Exchange (CME).
Commodities
Essentially, the term pork bellies is the commodity traders’ way of saying bacon. Physically, pork bellies come from the underside of a hog and weigh approximately 12 Pounds. These pork bellies are generally stored frozen for extended periods of time, pending delivery to consumers.
As with most other livestock products, the CME offers a futures contract for frozen pork bellies.
Soybeans are used for everything from poultry feedstock to the creation of vegetable oil. There are different soybean extracts you can trade on the commodities markets: soybeans themselves, soybean oil, and soybean meal.
If you’re interested in getting more background information on the soybean industry, check out the following list:
American Soybean Association
Iowa Soybean Association
Soy Protein Council
Soy Stat Reference Guide
Soybeans
Although most soybeans are used for the extraction of soybean oil (used as vegetable oil for culinary purposes) and soybean meal (used primarily as an agricultural feedstock), whole soybeans are also a tradable commodity.
Commodities
The lean hog commodity futures contract (which is a contract for the hog’s carcass) trades on the Chicago Mercantile Exchange (CME) and is used primarily by producers of lean hogs — both domestic and international — and pork importers/exporters.
Launched in 1997, the lean hog contract is a fairly new addition to the CME, launched as a replacement after the live hog futures contract was retired.
Commodities
Whether you decide to invest through futures contracts, commodity companies, or managed funds, you need to gather as much information as possible about the underlying commodity itself. This caveat is perhaps the most important piece of the commodities puzzle because the performance of any investment vehicle you choose depends on the actual fundamental supply-and-demand story of the commodity.
Commodities
The industrial sector is the largest consumer of natural gas commodities, accounting for almost 40 percent of total consumption. Although industrial uses of natural gas have always played a major role in the sector, their significance has increased during the last several years and will continue to do so.
The industrial sector has always accounted for a large part of natural gas use, and because this trend will continue, it’s a good area to consider investing in.
Commodities
During parts of the 19th and 20th centuries, the global powers of the time were embroiled in a strategic geopolitical contest over control of commodities, commonly referred to as “The Great Game.”
The 21st century is experiencing a new great game, in which the stakes are higher and the competition fiercer. The world’s industrialized and rapidly industrializing countries are prowling the investment landscape in search of secure energy and raw material sources.
As an asset class, commodities have unique characteristics that separate them from other asset classes and make them attractive, whether as independent investments or as part of a broader investment strategy. One of these is the inelasticity of commodities.
In economics, elasticity seeks to determine the effects of price on supply and demand.
Commodities
Because commodity futures contracts can be traded on only designated and regulated exchanges, these contracts are highly standardized. Standardization simply means that these contracts are based on a uniform set of rules. For example, the CME crude oil contract is standardized because it represents a specific grade of crude (West Texas Intermediate) and a specific size (1,000 barrels).
Commodities
Using these resources will help you keep up to date on major events that move commodities markets. Although not all of these resources deal specifically with commodities, they are indispensable sources of information because they help you get a sense of where the financial markets are heading.
The Wall Street Journal
For daily intakes of financial news, nothing beats The Wall Street Journal.
Aluminum is one of the most ubiquitous commodity metals of modern society. Not just aluminum soda cans account for its widespread use — aluminum is also used in transportation (cars, trucks, trains, and airplanes), construction, and electrical power lines, to name just a few end uses. As a matter of fact, aluminum is the second most widely used metal in the world, right after steel.
The commodities markets are broad and deep, presenting both challenges and opportunities. Investors are often overwhelmed simply by the number of commodities out there: more than 30 tradable commodities to choose from.
How do you decide whether to trade crude oil or gold, sugar or palladium, natural gas or frozen concentrated orange juice, soybeans or aluminum?
Copper, the third most widely used metal in the world, has applications as a commodity in many sectors, including construction, electricity conduction, and large-scale industrial projects. Copper is sought after because of its high electrical conductivity, resistance to corrosion, and malleability. Copper played a huge role during the Industrial Revolution and in connecting and wiring the modern world.
Commodities
Some investors think that “futures and options” and “commodities” are basically the same, but they’re not. Commodities are a class of assets that includes energy, metals, agricultural products, and similar items. Futures and options are investment vehicles through which you can invest in commodities.Think of it this way: If commodities were a place, futures and options would be the vehicle you’d use to get there.
Palladium, which belongs to the platinum group of metals (PGM), is a popular alternative commodity to platinum in the automotive industry and the jewelry industry. Its largest use comes into play in the creation of pollution-reducing catalytic converters. Palladium’s malleability and resistance to corrosion make it the perfect metal for such use.
Platinum is one of the rarest and most precious metals in the world. Perhaps no other metal or commodity carries the same cachet as platinum, and for good reason. If you put all the platinum that has ever been mined into an Olympic-size swimming pool, that platinum wouldn’t even cover your ankles!
Whereas precious and base metals such as gold and copper have been exploited for thousands of years, man’s interest in platinum developed only in the 17th century, when the Conquistadors discovered large amounts of the metal in South America.
Silverware and jewelry aren’t the only uses for the commodity silver. As a matter of fact, silverware is only a small portion of the silver market. A large portion of this precious metal goes toward industrial uses, such as conducting electricity; creating bearings; and welding, soldering, and brazing (the process by which metals are permanently joined together).
The development of steel and its use as an economic commodity, alongside iron, changed the course of human history. In fact, the last stage of prehistoric times, the Iron Age, is named thus because humans mastered the iron- and steel-making processes. This development allowed societies to build tools and weapons, which speeded advancements in construction and technology.
Commodities
Steel, aluminum, and copper may not be as glamorous as their precious metals counterparts, but they’re perhaps even more precious as commodities within the global economy.
Gold, silver, and platinum do have industrial applications, but their primary value is derived from their ability to act as stores of value, in addition to their use in jewelry.
Zinc and nickel are important components of the commodity metals complex because of their wide use in industry. These metals may not get much attention from the financial press, but you still need to consider including them in your portfolio: They’re essential building blocks of the global economy.
Zinc commodities
Zinc is the fourth most widely used metal, right behind iron/steel, aluminum, and copper.
Because the commodities markets are so wide and deep, you have a number of investment vehicles to access these markets. While the futures markets certainly provide an avenue into the commodities markets, you can also achieve exposure to commodities in your investment portfolio by investing in commodity companies.
Commodities
Aluminum is a lightweight metal that’s resistant to corrosion. Because of these characteristics, it’s a commodity that is widely used to create a number of products, from cars to jets.
Aluminum commodity futures
You can invest in aluminum through the futures markets. Previously, two major contracts for aluminum were available.
Commodities
Another investment vehicle for exposure to copper commodities is companies that specialize in mining and processing copper ore. The companies here are leaders in their industry and are involved in all aspects of the copper supply chain.
The only drawback of investing in companies is that you don’t get direct exposure to the price fluctuations of the metals.
Commodities
Like most of the other important industrial metals, there’s a commodities futures market available for copper trading. Large industrial producers and consumers of the metal account for most of this market, although you also can use it for investment purposes. You have two copper contracts to choose from:
CME/COMEX Copper (COMEX: HG): This copper contract trades in the COMEX division of the Chicago Mercantile Exchange (CME).
Commodities
A common misconception among investors is that you can only trade commodities by opening a futures account. While the futures markets certainly provide an avenue into the commodities markets, you have other tools at your disposal, including investing through funds and indexes.
Exchange Traded Funds
Since they first emerged on the scene a few years ago, the popularity of Exchange Traded Funds (ETFs) has soared.
Exchange-traded funds that offer exposure to commodities are a popular investment gateway for folks who don’t want to mess around with futures contracts. Signaling gold’s importance, one of the first commodity ETFs to hit the market is, you guessed it, a gold ETF. Currently, you can choose from two gold ETFs:
iShares COMEX Gold Trust (AMEX: IAU): The iShares gold ETF holds a little more than 1.
Commodities
Gold futures contracts give you a direct way to invest in gold commodities through the futures markets. You can choose from two gold futures contracts that are widely traded in the United States:
CME/CBOT Mini-Gold (CBOT: YG): Launched in 2004, this gold contract, trading in the CBOT section of the Chicago Mercantile Exchange (CME), is a relative newcomer to the North American gold futures market.
Commodities
One of the unique characteristics of silver among other commodities is that you can invest in it by actually buying the stuff, as you can buy gold coins and bars for investment purposes. Most dealers that sell gold generally offer silver coins and bars as well.
100-ounce silver bar: If you’re interested in something substantial, you can buy a 100-ounce silver bar.
Commodities
Platinum’s unique characteristics as a highly sought-after precious metal with industrial applications make it an ideal commodity to invest in. Fortunately, you can invest in platinum in a number of ways.
Platinum futures contract
The most direct way of investing in platinum is to go through the futures markets.
Commodities
Silver can play an important role in your commodity portfolio. Because of its precious metal status, you can use it as a hedge against inflation and to preserve part of your portfolio’s value. In addition, because it has important industrial applications, you can use it for capital appreciation opportunities. Whether for capital preservation or appreciation, any portfolio has room for some exposure to silver.
Commodities
Another alternative commodities investment route is to go through companies that mine silver. Although some of the larger mining companies have silver-mining operations, you can get more direct exposure to the silver markets by investing in companies that specialize in mining this precious metal. These companies may not be household names, but they’re a potentially good investment nevertheless.
Commodities
Although futures contracts are available for all commodities from crude oil to coffee, there’s no underlying futures contract for steel. However, a number of exchanges have expressed interest in developing a steel futures contract, so keep an eye out for such a development.
For now, the best way to get exposure to steel is to invest in companies that produce steel, specifically globally integrated steel companies.
Commodities
Another way to get exposure to commodities of gold is to invest in gold-mining companies. A number of companies specialize in mining, processing, and distributing this precious metal. Here are some of the best companies to consider:
AngloGold Ashanti Ltd. (NYSE: AU): AngloGold, which is listed in five different stock exchanges around the world, is a truly global gold company.
Commodities
Latin American countries dominate the sugar trade; Brazil is the largest sugar producer in the world. In 2009, the top ten sugar producers accounted for 74 percent of global production.
Country
Sugar Production (Millions of Tons)
Brazil
36
E.U.
18
India
17
China
13
Thailand
8
United States
7
South Africa
6
Mexico
5
Australia
4.
Just what are commodities? Put simply, commodities are the raw materials humans use to create a livable world. Humans have been exploiting earth’s natural resources since the beginning of time. They use agricultural products to feed themselves, metals to build weapons and tools, and energy to sustain themselves.
Commodities
One of the best — albeit indirect — methods of getting exposure to the commodities markets in palladium is investing in companies that mine the metal. A number of companies specialize in this activity, but take a look at these two:
North American Palladium (AMEX: PAL): North American Palladium, headquartered in Toronto, has a significant presence in the Canadian palladium ore–mining business.
The most direct method of investing in natural gas is to trade futures contracts on one of the designated commodities exchanges. The Chicago Mercantile Exchange (CME), the exchange for energy products, gives you the option to buy and sell natural gas futures and options.
To trade futures, you need to have a futures account with a designated broker, known as the futures commission merchant (FCM).
A new breed of Exchange-Traded Funds (ETFs) is emerging and is having a major impact on the ETF and commodity landscapes: leveraged ETFs. As the name suggests, leveraged ETFs (or LETFs, for short) seek to boost the returns of the underlying asset by using an added layer of leverage.
LETFs often do this through futures, options, and swaps, to enhance returns.
A number of commodity exchanges operate worldwide and specialize in all sorts of commodities. Before 2007, the industry was characterized by several players, each dominant in a particular segment of the market. Although some overlap existed among some of the commodities the exchanges offered, most exchanges offered unique contracts.
In a managed commodity account, you’re essentially transferring the responsibility of making all buying and selling decisions to a trained professional instead of making those choices yourself.
Open a managed account in these cases:
You don’t follow the markets on a regular (that is, daily) basis but are interested in getting exposure to commodities.
One of the unique characteristics of commodity futures contracts is the ability to trade with margin. If you’ve ever traded stocks, you know that margin is the amount of borrowed money you use to pay for stock. Margin in the futures markets is slightly different than stock market margin.
In the futures markets, margin refers to the minimum amount of capital that must be available in your account for you to trade futures contracts.
Commodities
The 20th century saw a proliferation of commodity exchanges around the world, with many based in the money centers of New York and Chicago. In the first decade of the 21st century, the industry experienced a major consolidation period — partly driven by electronic-based trading platforms — that dramatically reduced the number of players in the space and increased the product offerings of the remaining exchanges.
Commodities
The increased demand for gold is linked to a number of reasons. To profit in commodities markets from this increased demand, you need to be familiar with the fundamentals of the gold market.
First, you need to know what gold is used for. You may not be surprised to hear that jewelry accounts for a large portion of gold demand.
Perhaps no other metal — or commodity — in the world has the cachet and prestige of gold. For centuries, gold has been coveted and valued for its unique metallurgical characteristics. It was such a desirable commodity that it developed monetary applications, and a number of currencies were based on the value of gold.
Commodities
Commodities have allowed nations to survive and thrive, but they’ve also given individuals tremendous wealth-accumulation possibilities. Some of the world’s most enduring fortunes have been built around commodities. Mayer Rothschild, patriarch of the European Rothschild banking family, made a fortune during the Napoleonic Wars by storing and distributing gold bullion to fund the British side of the war effort.
Commodities
It’s not a widely known fact, but natural gas is a commodity used in a number of vehicles (approximately three million worldwide) as a source of fuel. These vehicles, known simply as natural gas vehicles (NGV), run on a grade of natural gas called compressed natural gas (CNG).
This usage accounts for only about 5 percent of total natural gas consumption, but demand for NGV may increase as a viable (cheaper) alternative to gasoline (a crude oil derivative).
The Organization of Petroleum Exporting Countries (OPEC) is made up of countries that are involved in the production and export of crude oil commodities around the world. Currently, OPEC has 11 member countries: Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates (UAE), and Venezuela.
Commodities
The companies responsible for transporting crude oil and petroleum products are an essential link in the global energy supply chain and provide a way to gain exposure to commodities without investing in futures. These companies are extremely varied in their locations and fleet styles.
With so many options to choose from, trying to identify which company to invest in can be confusing.
Commodities
One factor you need to consider if you’re planning to gain exposure to oil commodities through the oil-shipping industry is the ships themselves. Before you invest in a tanker stock, closely examine the fleet of vessels it operates.
To help you with this examination, here are some of the types of vessels used in the global crude oil-shipping industry:
Ultra Large Crude Carrier (ULCC): This type of vessel, known in the industry as the ULCC, is the largest vessel in the market.
Commodities
Commodities such as oil and gas would be useless if there was no way of transporting them to consumers. In fact, transporting commodities to consumers is probably as important as finding and processing them in the first place. Fortunately, as an investor, this need provides you with fertile ground to make money in the transportation of commodities.
Commodities
If you can’t decide which oil company you want to invest in when you’re entering commodity investing, you have several other options that allow you to buy the market, so to speak. One option is to buy exchange-traded funds (ETFs) that track the performance of a group of integrated oil companies. Here are a few oil company ETFs to consider:
Energy Select Sector SPDR (AMEX: XLE): The XLE ETF is the largest energy ETF in the market.
Commodities
Orange juice is one of the only actively traded contracts in the futures markets that’s based on a tropical fruit: oranges. Oranges are widely grown in the Western Hemisphere, particularly in Florida and Brazil. Brazil is by far the largest producer of oranges, although the United States — primarily Florida — is also a major player.
Commodities
Commodity exchanges are under strict oversight, to protect all market participants and ensure transparency in the exchanges. These main regulatory organizations have oversight of commodity exchanges in the United States:
Commodity Futures Trading Commission (CFTC): The CFTC is a federal regulatory agency created by Congress in 1974.
Commodities
The concept of peak oil has generated much attention recently. Books have been written about whether the world is running out of the commodity, and proponents (and opponents) of this theory have hit the airwaves en masse.
This topic is a serious one, but unfortunately, folks tend to get carried away and start spinning tales of global gloom and doom.
Commodities
Commodity investing requires the recognition that commodities take a long time to bring to market and that commodities often move in different cycles than the business market. A good example of this capital- and time-intensive aspect is the construction of the Baku-Tbilisi-Ceyhan (BTC) oil pipeline.
The BTC pipeline links a large Azerbaijan offshore oil field located in the Caspian Sea (the Azeri-Chirag-Guneshi oil field) to the Turkish port city of Ceyhan in the Mediterranean Sea.
Commodities
Gold is unlike any other commodity because it’s one of the few commodities that can be physically stored to have its value preserved or increased over periods of time. One investment method unique to gold is to actually buy it — hard, physical gold. You can purchase gold bars, bullion, and coins and store them in a safe location as an investment.
Commodities
Perhaps even more significant than population growth for the growth in commodity markets is the fact that it’s accompanied by the largest urbanization movement the world has ever seen.
In the early 20th century, according to the United Nations (UN), less than 15 percent of the world’s population lived in cities; by 2005, that number jumped to 50 percent — and shows no sign of decreasing.
Commodities
As with other fossil fuel commodities, coal comes in different qualities. Specifically, coal comes in four categories, classified by its carbon, sulfur, and ash content, as well as by the level of energy it releases.
Here are the four major categories of coal:
Lignite: Lignite contains the least amount of carbon and the most sulfur and ash of all coal types, so it’s considered the least valuable.
Commodities
You cannot completely eliminate risk in commodities markets, but you can sure take steps to help you reduce it. One way to minimize risk is to research all aspects of the investment you’re about to undertake — before you undertake it. Too often, investors don’t start doing research until after they invest in commodities companies.
Commodities
Most oil companies have added non-petroleum energy sources to their product research mix, providing exposure to energy commodities of all kinds. These companies not only process crude oil into different products, but they also have vast petrochemicals businesses, as well as growing projects that involve natural gas and, increasingly, alternative energy sources.
Investing in commodities through master limited partnerships (MLPs) comes with a number of risks. Here’s a quick list of some of those risks so that you don’t come upon any surprises when you get your K-1 tax form in February:
Management risk: Because as a limited partner you have no say in the way the business is run, you’re essentially handing over control to the general partner to manage the MLP as she sees fit.
Commodities
The shares that a commodity master limited partnership (MLP) issues are called units, and investors who own these units are known as unit holders. When you invest in an MLP, you’re essentially investing in a public partnership. This partnership is run by a general partner for his benefit and, more important, for that of the limited partners (which you become when you buy MLP units).
After you select a commodity brokerage firm you’re comfortable with, it’s time to open an account and start trading! You can choose from a number of different brokerage accounts. Most firms will offer you at least two types of accounts, depending on the level of control you want to exercise over the account.
If you feel confident about your trading abilities, a self-directed account, in which you call the shots, is the most suitable account for you.
Commodities
One group that trades commodities in futures contracts consists of individual traders, investment banks, and other financial institutions who are interested in using the futures markets as a way of generating trading profits.
For some reason, the term speculator carries some negative connotation, as if speculating is a sinful or immoral act.
Commodities
Because banks provide the necessary liquidity and credit availability for the global economy to function, the disruption in the banking system disrupted commodities markets, capital markets, and the real economy. What started as several delinquent accounts in a subsection of the real estate market ended up disrupting the world economy — and, with it, prices for everything from crude oil and aluminum to corn and soybeans.
Commodities
Since autumn 2001, commodities have been running faster than the bulls of Pamplona. The Reuters/Jefferies CRB Index (a benchmark for commodities) nearly doubled between 2001 and 2006. During this period, oil, gold, copper, and silver hit all-time highs (although not adjusted for inflation). Other commodities also reached levels never seen before in trading sessions.
Exchange-Traded Funds, or ETFs, offer many advantages to commodities investors because they offer exposure to asset classes and specific investments that would otherwise be difficult for the average investor to access, such as uranium or palladium.
In addition, they give you a broad diversification platform because they can track a basket of stocks or commodities.
Whether you’re an individual seeking to hedge commodity prices for the future or an investor interested in capturing price discrepancies and fluctuations in the global commodity markets, the commodity exchange will help you achieve your goals.
Commodity exchanges give investors and traders the opportunity to invest in commodities by trading futures contracts, options on futures, and other derivative products.
Launched in 2003 by Deutsche Bank, the Deutsche Bank Liquid Commodity Index (DBLCI) is the new kid on the index block and has the most distinct approach to tracking commodity futures contracts. The DBLCI tracks just six commodity contracts: two in energy, two in metals, and two in agricultural products.
The weighting of the DBLCI is done at the end of the year, and it seeks to reflect global production values.
Commodities
There’s a big difference between futures and options. Often folks think of futures and options as being one and the same in the commodities markets — that’s understandable, because whenever you hear “futures,” “options” is never too far behind! However, futures and options are different financial instruments with singular structures and uses.
With approximately $31 billion tracking it (2010 figures), the Dow Jones–AIG Commodity Index (DJ-AIGCI) is one of the most widely followed indexes in the market. The DJ-AIGCI places a premium on liquidity but also chooses commodities based on their production value.
The DJ-AIGCI is one of the few indexes that places a floor and ceiling on individual commodities and component classes.
Commodities
One of the most noteworthy events in the commodities sector over the last several years, gripping the petroleum industry, has been the prolific discoveries of oil in offshore Brazil.
Since 2007, the steady stream of important discoveries coming out of Brazil has seemed endless. First, the Tupi oil field that was discovered off the southeastern coast, not far from Rio de Janeiro, added between 6 billion and 8 billion barrels to the country’s petroleum reserves.
Commodities
The future for natural gas commodity investing looks bright. The total natural gas consumption on a global scale in 2005 was approximately 100 trillion cubic feet (100 Tcf). In 2010, that figure increased to 120 Tcf. By 2020, that figure is estimated to increase by more than 50 percent, to a total of 156 Tcf.
Credit: Source: U.
Commodities
Trading commodity futures contracts certainly isn’t for the fainthearted. Even the pros can run into lots of trouble in the futures markets. Consider what happened in the 1990s to a company called Metallgesellschaft. Metallgesellschaft (MG) was a German company partly owned by a conglomerate led by Deutsche Bank that specialized in metals trading.
Commodities
How do you go about investing in commodities through a master limited partnership (MLP)? It’s quite simple, really. Because MLPs are publicly traded, you can purchase any of them on the exchange on which it’s traded by calling your broker to purchase MLP units or by buying them through an online trading account, if you have one.
Commodities
If you’re scratching your head trying to figure out the structure of master-limited partnership (MLP) commodity investment firms, don’t worry. Because of regulatory, legal, and corporate reasons, the structures of many MLPs can get pretty convoluted!
Here’s an example. Kinder Morgan is one of the largest energy transportation and distribution companies in the United States.
Trading commodities through futures contracts takes a lot of discipline, patience, and coordination. One of the biggest deterrents to participating in the futures markets is the number of moving pieces you have to constantly monitor.
Underlying asset
The underlying asset is the financial instrument that the futures contract represents.
Commodities
In finance, leverage refers to the act of magnifying returns in the commodities markets through the use of borrowed capital. Leverage is a powerful tool that gives you the opportunity to control large market positions with relatively little upfront capital. However, leverage is the ultimate double-edged sword because both your profits and losses are magnified to outrageous proportions.
Commodities
Created in 1957 as the Commodity Research Bureau’s official commodity-tracking index, this index is the oldest commodity index in the world. The original index received its most recent makeover in 2005 when it was renamed the Reuters/Jefferies Commodity Research Bureau Index (CRB) — quite a mouthful!
The CRB index is widely followed by institutional investors and economists; of all the indexes, it’s perhaps the most widely used as an economic benchmark, although the S&P GSCI and the DJ/AIGCI are also widely used references.
With a grand total of 35 listed commodities, the Rogers International Commodities Index (RICI) tracks the most commodities among the different indexes. The RICI is the brainchild of famed commodities investor Jim Rogers, who launched the index to achieve the widest exposure to commodities.
As with the other commodity indexes, the RICI includes traditional commodities such as crude oil, natural gas, and silver.
Commodities
When you pick up the phone or log in to your online account and place an order for a commodity, it’s sometimes easy to forget that your order isn’t placed in a vacuum. You place the order and wait for the confirmation number. Seems simple, right? Not quite.
A number of people are involved in making sure that your order is executed as smoothly and efficiently as possible, and your order goes through an extensive supply chain before it’s executed.
Commodities
A number of people are involved in making sure that your commodity order is executed as smoothly and efficiently as possible, and your order goes through an extensive supply chain before it’s executed.
The card clocker
The card clocker sits in the middle of the ring, where she’s literally at the center of the action.
The S&P Goldman Sachs Commodity Index (S&P GSCI) is one of the most closely watched indexes in the market. Launched in 1992 by the investment bank Goldman Sachs, it tracks the performance of 24 commodity futures contracts.
In 2007, Standard & Poor’s (S&P) purchased the original GSCI from Goldman Sachs and is now responsible for its operations.
Commodities
The California Gold Rush was a defining moment in the history of the United States, focused on the commodity gold. When word spread that gold had been discovered in the San Francisco area, many young men rushed out West with a burning desire to strike it rich.
A number of success stories emerged from this era.
Commodities
There are many moving pieces involved in trading commodity futures contracts. The regulatory bodies that are responsible for overseeing and monitoring trading activities on commodity futures exchanges are the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA).
Trading months
Although you can trade futures contracts practically around the clock, certain commodities are available for delivery only during certain months.
Commodities
Liquefied natural gas, or LNG, is a recent development in the commodities field. LNG is exactly what it says it is: natural gas in a liquid form. The reason for this development is quite simple: As demand for natural gas increases, you need to be able to transport this precious commodity across vast distances (for example, across continents and through oceans).
Food is the most essential element of human life, and the production of food presents solid money-making opportunities for non-farmers through investing in the commodities markets.
Coffee: Coffee is the second most widely produced commodity in the world, in terms of physical volume, behind only crude oil. Folks just seem to love a good cup of coffee, and this provides good investment opportunities.
One of the most important pieces of information you need to indicate in a commodity transaction is the order type. This indicates how you want your order to be placed and executed.
Order Type
What It Means
Fill or kill (FOK)
Use this order if you want your order to be filled right away
at a specific price. If a matching offer isn’t found within
three attempts, your order is cancelled, or
“killed.
Commodities
Crude oil by itself isn’t very useful; it derives its value as a commodity from its products. Only after it’s processed and refined into consumable products such as gasoline, propane, and jet fuel does it become so valuable.
Crude oil was formed over millions of years from the remains of dead animals and other organisms whose bodies decayed in the earth.
Energy has always been indispensable for human survival and also makes for a great commodities investment. Energy, whether fossil fuels or renewable energy sources, has attracted a lot of attention from investors as they seek to profit from the world’s seemingly unquenchable thirst for energy.
Crude oil: Crude oil is the undisputed heavyweight champion in the commodities world.
Metallurgy has been essential to human development throughout history. Like societies that have survived and thrived through mastering metallurgy, investors who have incorporated metal commodities into their portfolios have been able to generate significant returns.
Gold: Gold is perhaps the most coveted resource on the planet.
Commodities
Like coffee, the cocoa commodities market is subject to seasonal and cyclical factors that have a large impact on price movements. Check out the price of the ICE cocoa futures contract in recent years. As you can see, it can be pretty volatile.
Credit: Source: International Cocoa OrganizationPrice of cocoa futures on the ICE, 2000-2010.
Commodities
When planning your investments in the oil commodity market, another pair of numbers to keep close tabs on is export and import figures. Exports are different from production: A country can produce a lot of oil and consume most, if not all, of it — as the United States does.
On the other end of the spectrum, a country can produce plenty of oil and export most of it, as is the case in the United Arab Emirates.
You can get access to the coal commodities markets either by trading coal futures directly or by investing in coal companies. Here are the details of each option:
Commodities investments in coal futures contracts
As with other members of the fossil fuel family, coal has an underlying futures contract that trades on a commodity exchange — in this case, the Chicago Mercantile Exchange (CME).
You have a number of investment vehicles to access the commodities futures markets. A common misconception among investors is that you can only trade commodities by opening a futures account. While the futures markets certainly provide an avenue into the commodities markets, you have other tools at your disposal.
Why is gold such an important commodity compared to other metals? The traits of ductility, malleability, quasi-indestructibility, and rarity can help you understand where gold derives its value:
Ductility: Gold is a very ductile metal. In metallurgy, ductility measures how much a metal can be drawn out into a wire.
Commodities
Commodities are unique among all investment options. Because commodities are physical necessities for much of modern life, they provide a security that cannot be found in most other investment opportunities.
Commodities as a safe haven
During times of turmoil, commodities tend to act as safe havens for investors.
Commodities
Some unique attributes of commodities require a different strategy than business investing. In particular, commodity investing requires the recognition that commodities take a long time to bring to market and that commodities often move in different cycles than the business market.
Time required to bring new commodity sources online
The business of commodities is a time- and capital-intensive business.
A commodity index tracks the price of a futures contract of an underlying physical commodity on a designated exchange. When you invest through one of the commodity indexes, you’re actually investing in the futures markets.
Indexes are known as passive, long-only investments, for two reasons: No one is actively trading the index, and the index tracks only the long performance of a commodity.
Commodities
One of the best ways to manage risk when investing in commodities is to diversify. This strategy applies on a number of levels: both diversification among asset classes, such as bonds, stocks, and commodities; and diversification within an asset class, such as diversifying commodity holdings among energy and metals.
In recent years, commodities as an asset class have attracted a lot of attention from the investor community. Many investors are turning to commodities because they see the value in investing in an asset class that’s growing in scale and importance.
The recent performance of the Reuters/Jefferies CRB Index accurately portrays the major dynamics at play in the commodities markets over the last several years.
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