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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Add another dimension to your portfolio with commodities Do you know how commodities stack up against other investment options? Investing In Commodities For Dummies is a straightforward resource that provides an in-depth look at what commodities are and how they might prove beneficial to your portfolio. This approachable reference covers the basics on breaking into the commodities market while dispelling myths and sharing a wide range of trading and investing strategies. Simply put, it spotlights the opportunities on the commodities market while leading you away from the mistakes that have plagued other investors. Use this text to understand how to diversify your portfolio, measure risk, and apply market analysis techniques that guide your decision-making. Commodities, including oil, silver, gold, and more, play an important role in everyday life. Because they hold such a steady role in today's world, many investors have found them to be a reliable component of a well-rounded portfolio. Depending upon your current investment portfolio and your financial goals, it might be a great idea to add commodities to your strategy. * Understand how to break into the commodities market and start trading immediately * Diversify your portfolio to protect your assets to meet your financial goals * Minimize the risk associated with your investment strategy while maximizing profits * Track commodities indexes and use this knowledge to make informed investment decisions Whether you're an amateur investor or you're simply looking to expand your investments, Investing In Commodities For Dummies is a fantastic guide to adding commodities to your investment strategy!
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Investing in Commodities For Dummies®
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Library of Congress Control Number: 2015951693
ISBN 978-1-119-12201-2 (pbk); ISBN 978-1-119-12203-6 (ePub); ISBN 978-1-119-12202-9 (ePDF)
Investing in Commodities For Dummies®
Visit www.dummies.com/cheatsheet/investingincommodities to view this book's cheat sheet.
Table of Contents
Cover
Introduction
About This Book
Icons Used in This Book
Beyond the Book
Where to Go from Here
Part I: Just the Facts on Commodities
Chapter 1: Investors, Start Your Engines! An Overview of Commodities
Defining Commodities and Their Investment Characteristics
Going for a Spin: Choosing the Right Investment Vehicle
Checking Out What’s on the Menu
Chapter 2: The Pros and Cons of Commodities
Why the 21st Century Is the Century of Commodities
What Makes Commodities Unique
Commodities and the Business Cycle
The Pitfalls of Using Leverage
Understanding the Real Risks behind Commodities
Managing Risk
Part II: Making Money in Energy
Chapter 3: It’s a Crude, Crude World: Investing in Crude Oil
Seeing the Crude Realities
Going Up the Crude Chain
Making Big Bucks with Big Oil
Chapter 4: Welcome to Gas Vegas! Investing in Natural Gas
What’s the Use? Looking at Natural Gas Applications
Liquefied Natural Gas: Getting Liquid Without Getting Wet
Investing in Natural Gas
Chapter 5: Investing in Renewable and Alternative Energy
Getting to Know Renewable Energy
Digging Up Further Energy Sources
Chapter 6: Totally Energized: Investing in Energy Companies
Bull’s-Eye! Profiting from Oil Exploration and Production
Oh My, You’re So Refined! Investing in Refineries
Becoming an Oil Shipping Magnate
Part III: Metals and Agricultural Products
Chapter 7: Investing in the Precious: Gold, Silver, and Platinum
Going for the Gold
Investing in Silver
Bling Bling: Investing in Platinum
Chapter 8: All About that Base: Investing in Steel, Aluminum, Copper, and Other Metals
Building a Portfolio as Strong As Steel
Aluminum: Illuminating the Details
Bringing Copper into Your Metals Mix
Palladium: Metal for the New Millennium
Zinc and Grow Rich
You Won’t Get Nickel and Dimed by Investing in Nickel
Chapter 9: Unearthing the Potential: Investing in Mining Companies
Considering Diversified Mining Companies
Checking Out Specialized Mining Companies
Making Money during the Mining Merger Mania
Chapter 10: Trading Agricultural Products
Giving Your Portfolio a Buzz by Investing in Coffee
Warming Up to Cocoa
Investing in Sugar: Sweet Move!
Orange Juice: Refreshingly Good for Your Bottom Line
Field of Dreams: Investing in Corn
Welcome to the Bread Basket: Investing in Wheat
It’s Not Just Peanuts: Trading Soybeans
Holy Cow! Investing in Cattle
Lean and Mean: Checking Out Lean Hogs
You Want Bacon with That? Trading Frozen Pork Bellies
Part IV: Selecting an Investment Approach
Chapter 11: Welcoming Commodities into Your Portfolio
The Color of Money: Taking Control of Your Financial Life
Looking Ahead: Creating a Financial Road Map
Making Room in Your Portfolio for Commodities
Fully Exposed: The Top Ways to Get Exposure to Commodities
Chapter 12: Investing in ETFs and Commodities Indexes
Getting to Know ETFs
Accessing Commodity Markets through ETFs
Taking a Look at Leveraged ETFs
Checking Out Commodity Indexes
Uncovering the Anatomy of a Commodity Index
Cataloguing Five Major Indexes
Determining Which Index to Use
Chapter 13: Getting a Grip on Futures and Options
The Future Looks Bright: How to Trade Futures Contracts
For a Few Dollars Less: Trading Futures on Margin
Figuring Out Where the Futures Market Is Heading
Trading with Options
Chapter 14: Choosing a Manager or Broker and Trading Accounts
Mutually Beneficial: Investing in Commodity Mutual Funds
Mastering MLPs
Relying on a Commodity Trading Advisor
Jumping into a Commodity Pool
Ready, Set, Invest: Opening an Account and Placing Orders
Part V: The Part of Tens
Chapter 15: Ten Market Indicators You Should Monitor
Consumer Price Index
EIA Inventory Reports
Federal Funds Rate
Gross Domestic Product
London Gold Fix
Nonfarm Payrolls
Purchasing Managers Index
Reuters/Jefferies CRB Index
U.S. Dollar
WTI Crude Oil
Chapter 16: Ten Investment Vehicles for Commodities
Futures Commission Merchant
Commodity Trading Advisor
Commodity Pool Operator
Integrated Commodity Companies
Specialized Commodity Companies
Master Limited Partnerships
Exchange Traded Funds
Commodity Mutual Funds
Commodity Indexes
Emerging Market Funds
About the Author
Cheat Sheet
Advertisement Page
Connect with Dummies
End User License Agreement
Guide
Cover
Table of Contents
Begin Reading
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Introduction
Why are commodities, long regarded as an inferior asset class, quickly moving to the investing mainstream? Good performance. Investors like to reward good performance, and commodities have performed well in recent years. In addition, investors can more easily access these markets: Plenty of new investment vehicles, from exchange-traded funds (ETFs) to master limited partnerships (MLPs), have been introduced to satisfy investor demand.
As commodities have been generating more interest, there’s a large demand for a product to help average investors get a grip on the market fundamentals. Commodities as an asset class have been plagued by a lot of misinformation, and it’s sometimes difficult to separate fact from fiction or outright fantasy. The aim of Investing in Commodities For Dummies is to help you figure out what commodities are all about and, more important, develop an intelligent investment strategy to profit in this market. Of course, as with every other asset class, commodities are subject to market swings and disruptions, which can be a source of risk but also an opportunity. As the 2008 Global Financial Crisis demonstrated, even the savviest investors with the latest up-to-date market information can struggle with unique investment events.
These disruptions are part of the market process. Investors who protect themselves through a “margin of safety” philosophy will be able to protect their downside during periods of extreme volatility. Using this book, you’ll better equip yourself to avoid the pitfalls inherent in any investment activity.
About This Book
My aim in writing Investing in Commodities For Dummies is to offer you a comprehensive guide to the commodities markets and show you a number of investment strategies to help you profit in this market. You don’t have to invest in just crude oil or gold futures contracts to benefit. You can trade ETFs, invest in companies that process commodities such as uranium, buy precious metals ownership certificates, or invest in master limited partnerships. The commodities markets are global in nature, and so are the investment opportunities. My goal is to help you uncover these global opportunities and offer you investment ideas and tools to unlock and unleash the power of the commodities markets. Best of all, I do all of this in plain English!
Anyone who’s been around commodities, even for a short period of time, realizes that folks in the business are prone to engage in linguistic acrobatics. Words like molybdenum, backwardation, and contango are thrown around like “hello” and “thank you.” Sometimes these words seem intimidating and confusing. Don’t be intimidated. Language is powerful, after all, and getting a grip on the concepts behind the words is critical, especially if you want to come out ahead in the markets. That’s why I use everyday language to explain even the most abstract and arcane concepts.
Icons Used in This Book
One of the pleasures of writing a For Dummies book is that you get to use all sorts of fun, interactive tools to highlight or illustrate a point. Here are some icons that I use throughout the book:
I use this icon to highlight information that you want to keep in mind or that’s referenced in other parts of the book.
When you see this icon, make sure that you read the accompanying text carefully: It includes information, analysis, or insight that will help you successfully implement an investment strategy.
I explain more technical information with this icon. The commodities markets are complex, and the vocabulary and concepts are quite tricky. You can skip these paragraphs if you just want a quick overview of the commodities world, but be sure to read them before seriously investing. They give you a better grasp of the concepts discussed.
Investing can be an extremely rewarding enterprise, but it can also be a hazardous endeavor if you’re not careful. I use this icon to warn you of potential pitfalls. Stay alert for these icons because they contain information that may help you avoid losing money.
Beyond the Book
In addition to all the material you can find in the book you’re reading right now, this product also comes with some access-anywhere goodies on the web. Check out the eCheat Sheet at www.dummies.com/cheatsheet/investingincommodities for helpful insights and details about the benefits of diversification, how to decipher public disclosure forms, and the major influencer of oil markets.
Where to Go from Here
I’ve organized this book in a way that gives you the most accurate and relevant information related to investing in general and commodity investing in particular. The book is modular in nature, meaning that although it reads like a book from start to finish, you can read one chapter or even a section at a time without needing to read the whole book to understand the topic that’s discussed.
If you’re a true beginner, however, I recommend that you read Parts I and II carefully before you start skipping around in the chapters on particular commodities.
Part I
Just the Facts on Commodities
Visit www.dummies.com for great Dummies content online.
In this part …
Know why you should invest in commodities, check out the commodities markets, and find the best ways to invest in commodities
Celebrate the advantages, acknowledge the downsides, and manage risk when investing in commodities
Chapter 1
Investors, Start Your Engines! An Overview of Commodities
In This Chapter
Finding out why you should invest in commodities
Defining the commodities markets
Determining the best ways to trade commodities
Identifying the major commodities
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. (I cover almost all of them — 32, to be exact — more than any other introductory book on the topic.) 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. Have no fear — this book provides you with the actionable information, knowledge, insight, and analysis to help you grab the commodities market by the horns. You’ve maybe heard a lot of myths and fantasies about commodities. I shatter some of these myths and, in the process, clear the way to help you identify the real money-making opportunities.
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 involved in commodities. Companies such as ExxonMobil (NYSE: XOM) focus 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 (all covered in Chapter 12). So although I do focus on the futures markets, I also examine investment opportunities in the equity markets and beyond.
The commodities universe is large, and investment opportunities abound. In this book, I help you explore this universe inside and out, 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; from the sugar plantations of Brazil to the steel mills of China.
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 — you also see how to capitalize on this information to generate profits.
Defining Commodities and Their Investment Characteristics
Just what, exactly, 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. Energy, metals, and agricultural products are the three classes of commodities, and they are the essential building blocks of the global economy.
For the purposes of this book, I present 32 commodities that fit a very specific definition, which I define in the following bulleted list. For example, the commodities I present must be raw materials. I don’t discuss currencies — even though they trade in the futures markets — because they’re not a raw material; they can’t be physically used to build anything. In addition, the commodities must present real moneymaking opportunities to investors.
All the commodities I cover in the book have to meet the following criteria:
Tradability: The commodity has to be tradable, meaning that there needs to be a viable investment vehicle to help you trade it. For example, I include a commodity if it has a futures contract assigned to it on one of the major exchanges, if a company processes it, or if an ETF tracks it.
Uranium, which is an important energy commodity, isn’t tracked by a futures contract, but several companies specialize in mining and processing this mineral. By investing in these companies, you get exposure to uranium.
Deliverability:
All the commodities have to be physically deliverable. I include crude oil because it can be delivered in barrels, and I include wheat because it can be delivered by the bushel. However, I don’t include currencies, interest rates, and other financial futures contracts because they’re not physical commodities.
Liquidity:
I don’t include any commodities that trade in illiquid markets. Every commodity in the book has an active market, with buyers and sellers constantly transacting with each other. Liquidity is critical because it gives you the option of getting in and out of an investment without having to face the difficulty of trying to find a buyer or seller for your securities.
Going for a Spin: Choosing the Right Investment Vehicle
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? I answer the second question first and then examine which commodities to choose.
The futures markets
In the futures markets, individuals, institutions, and sometimes governments transact with each other for price-hedging and speculating purposes. 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. This transaction in the futures markets allows the airline to hedge against the volatility associated with the price of jet fuel. Although commercial users are the main players in the futures arena, traders and investors also use the futures market to profit from price volatility through various trading techniques.
One such trading technique is arbitrage, which takes advantage of price discrepancies between different futures markets. For example, in an arbitrage trade, you purchase and sell the crude oil futures contract simultaneously in different trading venues, for the purpose of capturing price discrepancies between these venues.
The futures markets are administered by the various commodity exchanges, such as the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (ICE). I discuss the major exchanges, the role they play in the markets, and the products they offer in Chapter 13.
The most direct way of investing in the futures markets is to open an account with a futures commission merchant (FCM). The FCM is much like a traditional stock brokerage house (such as Schwab, Fidelity, or Merrill Lynch), except that it’s allowed to offer products that trade on the futures markets. Here are some other ways to get involved in futures:
Commodity trading advisor (CTA):
The CTA is an individual or company licensed to trade futures contracts on your behalf.
Commodity pool operator (CPO):
The CPO is similar to a CTA, except that the CPO can manage the funds of multiple clients under one account. This pooling provides additional leverage when trading futures.
Commodity indexes:
A commodity index is a benchmark, similar to the Dow Jones Industrial Average or the S&P 500, that tracks a basket of the most liquid commodities. You can track the performance of a commodity index, which allows you to essentially “buy the market.” A number of commodity indexes are available, including the Goldman Sachs Commodity Index and the Reuters/Jefferies CRB Index, which I cover in
Chapter 12
.
These examples are only a few ways to access the futures markets. Be sure to read Chapters 11 and 12 for additional methods.
A number of organizations regulate the futures markets, including the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). These organizations monitor the markets to prevent market fraud and manipulation and to protect investors from such activity. Check out Chapter 13 for an in-depth analysis of the role these regulators play and how to use them to protect yourself from market fraud.
Trading futures isn’t for everyone. By their very nature, futures markets, contracts, and products are extremely complex and require a great deal of mastery by even the most seasoned investors. If you don’t feel that you have a good handle on all the concepts involved in trading futures, don’t simply jump into futures — you could lose a lot more than your principal (because of the use of leverage and other characteristics unique to the futures markets). If you’re not comfortable trading futures, don’t sweat it. You can invest in commodities in multiple other ways.
The equity markets
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. The only drawback of the equity markets is that you have to take into account external factors, such as management competence, tax situation, debt levels, and profit margins, which have nothing to do with the underlying commodity. That said, investing in companies that process commodities still allows you to profit from the commodities boom.
Publicly traded companies
The size, structure, and scope of the companies involved in the business are varied, and I cover most of these companies throughout the book. I offer a description of the company, including a snapshot of its financial situation, future growth prospects, and areas of operation. I then make a recommendation based on the market fundamentals of the company.
You encounter these types of companies in the book:
Diversified mining companies:
A number of companies focus exclusively on mining metals and minerals. Some of these companies, such as Anglo-American PLC (NASDAQ: AAUK) and BHP Billiton (NYSE: BHP), have operations across the spectrum of the metals complex, mining metals that range from gold to zinc. I look at these companies in
Chapter 9
.
Electric utilities:
Utilities are an integral part of modern life because they provide one of life’s most essential necessities: electricity. They’re also a good investment because they have historically offered large dividends to shareholders. Read
Chapter 5
to figure out whether these companies are right for you.
Integrated energy companies:
These companies, such as ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX), are involved in all aspects of the energy industry, from the extraction of crude oil to the distribution of liquefied natural gas (LNG). They give you broad exposure to the energy complex (see
Chapter 6
).
This list is only a small sampling of the commodity companies I cover in these pages. I also analyze highly specialized companies, such as coal-mining companies (Chapter 5), oil refiners (Chapter 6), platinum-mining companies (Chapter 7), and purveyors of gourmet coffee products (Chapter 10).
Master limited partnerships
Master limited partnerships (MLPs) invest in energy infrastructure such as oil pipelines and natural gas storage facilities. I’m a big fan of MLPs because they’re a publicly traded partnership. They offer the benefit of trading like a corporation on a public exchange, while offering the tax advantages of a private partnership. MLPs are required to transfer all cash flow back to shareholders, which makes them an attractive investment. I dissect the structure of MLPs in Chapter 12 and introduce you to some of the biggest names in the business so you can take advantage of this unique investment.
Managed funds
Sometimes it’s just easier to have someone else manage your investments for you. Luckily, you can count on professional money managers who specialize in commodity trading to handle your investments.
Consider a few of these options:
Exchange-traded funds (ETFs):
ETFs are an increasingly popular investment because they’re managed funds that offer the convenience of trading like stocks. In recent years, a plethora of ETFs has appeared to track everything from crude oil and gold to diversified commodity indexes. Find out how to benefit from these vehicles in
Chapter 12
.
Mutual funds:
If you’ve previously invested in mutual funds and are comfortable with them, look into adding a mutual fund that gives you exposure to the commodities markets. A number of funds are available that invest solely in commodities. I examine these commodity mutual funds in
Chapter 12
.
If you have a pet or a child, sometimes you hire a pet sitter or babysitter to look out after your loved ones. Before you hire this individual, you interview candidates, check their references, and examine their previous experience. When you’re satisfied with the top candidate’s competency, only then do you entrust that person with the responsibility of looking after your cat, daughter, or both. The same thing applies when you’re shopping for a money manager, or money sitter. If you already have a money manager you trust and are happy with, stick with him. If you’re looking for a new investment professional to look after your investments, you need to investigate him as thoroughly as possible. In Chapter 14, I examine the selection criteria to use when shopping for a money manager.
Physical commodity purchases
The most direct way of investing in certain commodities is to actually buy them outright. Precious metals such as gold, silver, and platinum are a great example of this. As the price of gold and silver has skyrocketed recently, you may have seen ads on TV or in newspapers from companies offering to buy your gold or silver jewelry. As gold and silver prices increase in the futures markets, they also cause prices in the spot markets to rise (and vice versa). You can cash in on this trend by buying coins, bullion, or even jewelry. I present this unique investment strategy in Chapter 7.
This investment strategy is suitable for only a limited number of commodities, mostly precious metals like gold, silver, and platinum. Unless you own a farm, keeping live cattle or feeder cattle to profit from price increases doesn’t make much sense. And I won’t even mention commodities like crude oil or uranium!
Checking Out What’s on the Menu
I cover 32 commodities in the book. Here’s a listing of all the commodities you can expect to encounter while going through these pages. (Although the book is modular in nature, I list the commodities here in order of their appearance in the text.)
Energy
Energy has always been indispensable for human survival and also makes for a great 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. I present in this book all the major forms of energy, from crude oil and coal to electricity and solar power, and show you how to profit in this arena.
Crude oil:
Crude oil is the undisputed heavyweight champion in the commodities world. More barrels of crude oil are traded every single day (87 million and growing) than any other commodity. Accounting for 40 percent of total global energy consumption, coal provides some terrific investment opportunities.
Natural gas:
Natural gas, the gaseous fossil fuel, is often overshadowed by crude oil. Nevertheless, it’s a major commodity in its own right, used for everything from cooking food to heating houses during the winter. I also take a look at the prospects of liquefied natural gas (LNG).
Coal:
Coal accounts for more than 20 percent of total world energy consumption. In the United States, the largest energy market, 50 percent of electricity is generated through coal. Because of abundant supply, coal is making a resurgence.
Uranium/nuclear power:
Because of improved environmental standards within the industry, nuclear power use is on the rise. I show you how to develop an investment strategy to capitalize on this trend.
Electricity:
Electricity is a necessity of modern life, and the companies responsible for generating this special commodity have some unique characteristics. I examine how to start trading this electrifying commodity.
Solar power:
For a number of reasons that range from environmental to geopolitical, demand for renewable energy sources such as solar power is increasing.
Wind power:
Wind power is getting a lot of attention from investors as a viable alternative source of energy.
Ethanol:
Ethanol, which is produced primarily from corn or sugar, is an increasingly popular fuel additive that offers investment potential.
Other commodities are in the energy complex, such as heating oil, propane, and gasoline. Although I do provide insight into some of these other members of the energy family, I focus a lot more on the resources in the previous list.
Metals
Metallurgy has been essential to human development since the beginning of time. Societies that have mastered the production of metals have been able to thrive and survive. Similarly, investors who have incorporated metals into their portfolios have been able to generate significant returns. I cover all the major metals, from gold and platinum to nickel and zinc.
Gold:
Gold is perhaps the most coveted resource on the planet. For centuries, people have been attracted to its quasi-indestructibility and have used it as a store of value. Gold is a good asset for hedging against inflation and also for asset preservation during times of global turmoil.
Silver:
Silver, like gold, is another precious metal that has monetary applications. The British currency, the pound sterling, is still named after this metal. Silver also has applications in industry (such as electrical wiring) that places it in a unique position of being coveted for both its precious metal status and its industrial uses.
Platinum:
Platinum, the rich man’s gold, is one of the most valuable metals in the world, used for everything from jewelry to the manufacture of catalytic converters.
Steel:
Steel, which is created by alloying iron and other materials, is the most widely used metal in the world. Used to build everything from cars to buildings, it’s a metal endowed with unique characteristics and offers good investment potential.
Aluminum:
Perhaps no other metal has the versatility of aluminum; it’s lightweight yet surprisingly robust. These unique characteristics mean that it’s a metal worth adding to your portfolio, especially because it’s the second most widely used metal (right behind steel).
Copper:
Copper, the third most widely used metal, is the metal of choice for industrial uses. Because it’s a great conductor of heat and electricity, its applications in industry are wide and deep, making this base metal a very attractive investment.
Palladium:
Palladium is part of the platinum group of metals, and almost half of the palladium that’s mined goes toward building automobile catalytic converters. As the number of cars with these emission-reducing devices increases, the demand for palladium will increase as well, making this an attractive investment.
Nickel:
Nickel is a ferrous metal that’s in high demand because of its resistance to corrosion and oxidation. Steel is usually alloyed with nickel to create stainless steel, which ensures that nickel will play an important role for years to come.
Zinc:
The fourth most widely used metal in the world, zinc is sought after for its resistance to corrosion. It’s used in galvanization, in which zinc coating is applied to other metals, such as steel, to prevent rust.
Agricultural products
Food is the most essential element of human life, and the production of food presents solid money-making opportunities. In this book you find out how to invest in the agricultural sector in everything from coffee and orange juice to cattle and soybeans:
Coffee:
Coffee is the second most widely produced commodity in the world, in terms of physical volume, behind only crude oil. Folks love a good cup of coffee, and this provides good investment opportunities.
Cocoa:
Cocoa production, which is dominated by a handful of countries, is a major agricultural commodity, primarily because it’s used to create chocolate.
Sugar #11:
Sugar is a popular food sweetener, and it can be a sweet investment as well. Sugar #11 represents a futures contract for global sugar.
Sugar #14:
Sugar #14 is specific to the United States and is a widely traded commodity.
Frozen concentrated orange juice — type A:
FCOJ-A, for short, is the benchmark for North American orange juice prices because it’s grown in the hemisphere’s two largest regions: Florida and Brazil.
Frozen concentrated orange juice — type B:
FCOJ-B, like FCOJ-A, is a widely traded contract that represents global orange juice prices. This contract gives you exposure to orange juice activity on a world scale.
Corn:
Corn’s use for culinary purposes is perhaps unrivaled by any other grain, which makes this a potentially lucrative investment. Check out
Chapter 10
.
Wheat:
According to archaeological evidence, wheat was one of the first agricultural products grown by man. It’s an essential staple of human life and makes for a great investment.
Soybeans:
Soybeans have many applications, including as feedstock and for cooking purposes. The soybean market is a large market and presents some good investment opportunities.
Soybean oil:
Soybean oil, also known as vegetable oil, is derived from actual soybeans. It’s used for cooking purposes and has become popular in recent years with the health-conscious dietary movement.
Soybean meal:
Soybean meal is another derivative of soybeans that’s used as feedstock for poultry and cattle. It may not sound sexy, but it can be a good investment.
Live cattle:
For investors involved in agriculture, using the live cattle futures contract to hedge against price volatility is a good idea.
Feeder cattle:
Whereas the live cattle contract tracks adult cows, the feeder cattle contract hedges against the risk associated with growing calves. The markets don’t widely follow this area, but it’s important to figure out how this market works.
Lean hogs:
They may not be the sexiest commodity out there, but lean hogs are an essential commodity, making them a good trading target.
Frozen pork bellies:
Frozen pork bellies are essentially nothing more than good old bacon. This industry is cyclical and subject to wild price swings, which provides unique arbitrage trading opportunities.
Chapter 2
The Pros and Cons of Commodities
In This Chapter
Examining strong reasons to consider commodities
Acknowledging the inherent downsides
Managing risk when investing in commodities
Commodities have traditionally been considered the black sheep in the family of asset classes; for several decades, no respectable money manager wanted anything to do with them. This traditional lack of interest (which no longer applies, by the way) has generated a lot of misinformation about commodities. As a matter of fact, probably no other asset class has suffered through so much misunderstanding and misconception.
Many investors are scared of venturing into the world of commodities. For one thing, it seems that every time the word commodities is uttered, someone pops up with a horrible story about losing their entire life savings trading soybeans, cocoa, or some other exotic commodity. Even though this negative perception is rapidly changing, commodities are still often misunderstood as an investment. I actually know some investors who invest in commodities (and who have made money off them) but who don’t understand the fundamental reasons commodities are such a good long-term investment.
In this chapter, I show you why commodities are an attractive investment and why many investors are becoming more interested in this asset class. Then again, I believe that many investors are afraid of commodities because they don’t know much about them. My further aim in this chapter is to shed some light on the issues surrounding commodities so that you can invest with confidence. I’m not denying that commodities present some risk — all investments do. And so I give you some tools to minimize and manage those risks.
Why the 21st Century Is the Century of 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.
Many investors wondered what was going on. Why were commodities doing so well when other investments, such as stocks and bonds, weren’t performing? I believe that we’re witnessing a long-term cyclical bull market in commodities. Because of a number of fundamental factors (which I go through in the following sections), commodities are poised for a rally that will last well into the 21st century — and possibly beyond that. It’s a bold statement, I know. But the facts are there to support me.
Although I’m bullish on commodities for the long term, I have to warn you that at times commodities won’t perform well at all. This statement is simply the nature of the commodity cycle. Furthermore, in the history of Wall Street, no asset has ever gone up in a straight line. Minor (and, occasionally, major) pullbacks always happen before an asset makes new highs — if, in fact, it does make new highs.
Consider an example. During the first few months of 2006, commodities outperformed every asset class, with some commodities breaking record levels. Gold and copper both hit a 25-year high. Then during the week of May 15, commodities saw a big drop. The Reuters/Jefferies CRB Index fell more than 5 percent that week, with gold and copper dropping 10 and 7 percent, respectively.
Many commentators went on the offensive and started bashing commodities. “We are now seeing the beginning of the end of the rally in commodities,” said one analyst. A newspaper ran the headline “Is This the End of Commodities?” An endless number of commentators hit the airwaves claiming that this was a speculative bubble about to burst. A respected economist even compared what was happening to commodities to the dotcom bubble: “There is no fundamental reason why commodity prices are going up.” Nothing could be further from fact. A couple weeks after this minor pullback, some of these commodities that were being compared to highly leveraged tech stocks had regained most, if not all, of their lost ground. Even after the GFC, most commodities are now back to their precrisis levels, with many others making all-time highs.
There’s a story behind the rise in commodities — and it’s a pretty compelling one.
