How to Understand Commodity Fundamentals before Investing - dummies

How to Understand Commodity Fundamentals before Investing

By Amine Bouchentouf

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.

Ask yourself a few questions before you start investing in a commodity, whether it’s coffee or copper:

  • Which country or countries hold the largest reserves of the commodity?

  • Is the country politically stable, or is it vulnerable to turmoil?

  • How much of the commodity is actually produced on a regular basis? (Ideally, you want to get data for the daily, monthly, quarterly, and annual basis.)

  • Which industries or countries are the largest consumers of the commodity?

  • What are the primary uses of the commodity?

  • Are there any alternatives to the commodity? If so, what are they, and do they pose a significant risk to the production value of the target commodity?

  • Do seasonal factors affect the commodity?

  • What’s the correlation between the commodity and comparable commodities in the same category?

  • What are the historical production and consumption cycles for the commodity?

These questions are only a few to ask before you invest in any commodity. Ideally, you want to be able to gather this information before you start trading.