Why Commodities Investments Behave Differently Than Business Investments - dummies

Why Commodities Investments Behave Differently Than Business Investments

By Amine Bouchentouf

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. Unlike investments in high-tech companies or other “new economy” investments (such as e-commerce), bringing commodity projects online takes a lot of time.

For example, it can take up to a decade to bring new sources of oil online. First, a company must identify potentially promising areas to explore for oil. After locating an area, the company has to actually start drilling and prospecting for the oil. If it’s lucky, this process of discovering significantly recoverable sources of oil takes only three to five years.

The company must then develop infrastructure and bring in machinery to extract the oil, which must be transported to a refining facility to be transformed into consumable energy products such as gasoline or jet fuel. After it goes through the lengthy refining stage, the end product must finally be transported to consumers.

Different stock cycles for commodities

You may have heard the saying “Sell in May and go away.” This is a Wall Street adage referring to stocks. The thinking goes that because the stock market doesn’t perform well during the summer months, you should sell your stocks and get back into the game in the fall.

This adage doesn’t apply to commodities because commodities move in different cycles than stocks. Some commodities perform really well during the summer months. For example, because summer is the heavy driving season, there’s an increase in demand for gasoline products. Thus, all things equal, unleaded gasoline tends to increase in price during the summer.