Introduction to Commodities Investing - dummies

Introduction to Commodities Investing

By Amine Bouchentouf

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? What about corn, feeder cattle, and silver — should you trade these commodities as well? And if you do, what’s the best way to invest in them?

Should you go through the futures markets, go through the equity markets, or buy the physical stuff (such as silver coins or gold bullion)? And do all commodities move in tandem, or do they perform independently of each other?

With so many variables to keep track of and options to choose from, just getting started in commodities can be daunting. You’ve maybe heard a lot of myths and fantasies about commodities, but have no fear.

For example, a lot of folks equate (incorrectly) commodities exclusively with the futures markets. Undoubtedly, the two are inextricably linked — the futures markets offer a way for commercial users to hedge against commodity price risks and a means for investors and traders to profit from this price risk. However, the futures market is only one planet in the commodities universe.

The equity markets are also deeply involved in commodities. Companies such as ExxonMobil (NYSE: XOM) focus exclusively on the production of crude oil, natural gas, and other energy products; Anglo-American PLC (NASDAQ: AAUK) focuses on mining precious metals and minerals across the globe; and Starbucks (NASDAQ: SBUX) offers investors access to the coffee markets.

Ignoring these companies that process commodities isn’t only narrow minded, but it’s also a bit foolish because they provide exposure to the very same commodities traded on the futures market.

In addition to the futures and equity markets, a number of investment vehicles allow you to access the commodities markets. These vehicles include master limited partnerships (MLPs), exchange-traded funds (ETFs), and commodity mutual funds.

The commodities universe is large, and investment opportunities abound, from the open outcry trading pits on the floor of the New York Mercantile Exchange to the labor-intensive cocoa fields of the Ivory Coast; from the vast palladium-mining operations in northeastern Russia to the corn-growing farms of Iowa; from the Ultra Large Crude Carriers that transport crude oil across vast oceans to the nickel mines of Papua New Guinea.

By exploring this fascinating universe, not only do you get insight into the world’s most crucial commodities — and get a glimpse of how the global capital markets operate — but you also find out how to capitalize on this information to generate profits.