For whatever reason, investors have come to reject commodity investing, and many see it as little more than gambling. Their reasoning: (from MotleyFool ), “Unfortunately, investing in the commodity markets is gambling to an extent, as no one is able to accurately forecast the price of commodities over time.” This claim is not very thought out, and it implies that no one has made good money from commodities; has this person forgotten that oil is a commodity? By the end of this article, you’ll be able to see the mental hoops investors are jumping through to reject commodity investing.
Jim Rogers, author of Hot Commodities, and Street Smarts, has made millions from commodity investing. Rogers makes great arguments to explain why commodity trading can even be less risky than the status quo of business investing.
You Only Have to Know 2 Things
Is there too much of it, or too little of it. Jim Rogers says this is all you need to know, which makes total sense; supply and demand guide the price of all goods and services. But what’s so special about commodity investing is that supply and demand is really all I need to know. Unlike the status quo investor, I need not worry myself with P/E ratios, balance sheets, cash flows, debts, or CEO’s. Again, all I need to know is, is there too much of it, or too little of it. Of course, sometimes those questions can be hard to answer, but it’s surely fewer questions to be concerned about.
Companies that produce commodities often rise and fall in tandem of commodity prices. The most common example of this gold mining companies that rise and fall in almost direct relation to the spot price of gold. Companies that mine and produce zinc, copper, and silver follow this same trend. Investopedia has a great article on the many different ways to invest in commodities.
COT charts, (Commitment of Traders Charts), help illuminate by showing the statistics on trader positions; they show who’s buying and who is selling what commodities. These charts help predict and explain price movements in commodities.
Another tool is the CRB Commodity Yearbook, which is a giant book filled with up-to-date technical analysis of each commodity traded on the market. It’s also a great resource for learning about the nuances of each specific commodity industry.
All of this isn’t to say that there’s no money to be made from the status quo investing; you certainly can. But what kind of intelligent investor would you be if you simply avoided an entire sector of the market because it sounds scary?