What are Commodities?
According to wikiHow, the term “commodities” refers to “raw materials and produce; metals like silver, gold and copper, and crops like corn, soy beans and grains are all commodities. Rather than buy up the materials themselves, investors participate in the commodities market by purchasing futures or stock, or by investing in exchange-traded funds (ETFs), index funds or mutual funds. It takes the right kind of individual to invest in commodities, as they are extremely risky. On the upside, buying commodities futures may be a smart way to hedge against inflation.” Investopedia explains that commodities are “an important part of everyday life, whether they are related to food, energy, or metals.” For investors who wish to diversify their investments and move beyond the traditional stocks and bonds, commodities are a good choice as they do not normally move along with the stock market.
How Do Commodities Move the Market?
As Investopedia explains, there are many factors which determine how the world’s equity markets move. The influence of the prices of commodities is an often overlooked, but very important part of that equation. It is important for those who wish to invest in commodities to understand how each of their prices will impact the market and why. This is because many aspects of the business market can be influenced by them. For example, the price of lumber. Investopedia shows that many businesses can be affected by the cost of lumber…even those which do not build homes. If the price of lumber goes up, so does the cost of building apartments, restaurants, hospitals, retail stores, etc. Just one tiny fluctuation in lumber prices can make a huge difference for these business, and therefore their customers. If you were considering an investment in lumber, you would need to be aware of all of these factors. The same is true of other commodities such as oil, cotton, gold, wheat, corn, etc all of which impact many different types of businesses.
Are Commodity Investments for You?
Just as with any other investment, commodity investments may not be a right fit for everyone. John W. Schoen, Senior Producer at msnbc.com feels, “There are plenty of good reasons to bet on commodities, but if you’re new to investing that’s probably a better way to think of it: as a bet. Since you’ll be betting against experts who do this for a living, your odds probably won’t be much better than playing the slots in Atlantic City.” He calls commodities “about the riskiest place to deploy your savings.”
Michale Holland of Holland & Co. in New York feels that those who wish to invest in commodities should do so by “taking a look at companies that are involved in the commodities business. He does not think that investing in commodities is a good idea for the small investor, because they are likely not “knowledgeable enough to anticipate the volatility and changes in the markets.”
Rick Ferri, founder of Portfolio Solutions LLC and the author of six books on low-cost index fund and ETF investing, feels that commodities are “like dead money” and that those who “stay away from this asset class” will be “better off for it in the long term.” Greg McBride, senior financial analyst and vice president at Bankrate.com, feels that commodities are important to those who have a large enough portfolio. (Quotes from Wall Street Journal)
Frank Holmes, chief executive and chief investment officer of U.S. Global Investors Inc, says, “Commodities are the building blocks of the world, essential to progress and prosperity. Among the world’s population of 7 billion, a majority live in the growing emerging markets. Many of these emerging-market residents are increasingly moving to cities and becoming wealthier, and have a desire to improve their standard of living. We believe these trends continue to drive the global demand for commodities and natural resources. However, investing in commodities is tricky, because they tend to have wide price fluctuations based on seasonal and cyclical factors. Therefore, we suggest investors hold a diversified basket of commodity-related stocks actively managed by professionals who understand the assets and the global trends that affect them.” So it would seem that commodities can be very beneficial, but more-so to the investor who has the right advisers, a large portfolio, investment experience, and can afford to lose from time to time. Small investors may want to wait on investing in commodities. (Quotes from Wall Street Journal)