Are Commodities an Excellent Investment?

by Wes Bridel on September 13, 2010

in Stewardship

Commodities are a key consideration for any portfolio.  We’ve been discussing asset management in a crazy economy and Friday looked at investing in food.

Thought we had already discussed commodities in recent posts?  Well, that’s true.  However, metals such as gold & silver also function as money.  Energy, such as oil, natural gas, and coal, are also in a league of their own because energy propels the economy.  Agribusiness means food and life cannot sustain itself without food.  Thus, we’ve separated these out so that we can focus on each specific category.

Commodities do all have similar characteristics though.  Light, Sweet Crude Oil found in the US is worth the same as that found in Europe or the Middle East.  Copper or Timber (of the same quality) is a universal product around the world.  When demand is higher than supply, the price will be high.  When supply is higher than demand, the price will be low.

There are two main drivers of commodites prices in the world. First is the growth of the worldwide economy which demands new building of all types.    The other is the firmness or devaluation of the particular currency which you are buying that commodity in.

Our Best Guess

We believe commodities prices will drop as it becomes clear that the world wide economy is contracting.  If this happens as we expect, that will enable much lower prices at which to take positions in.  However, we believe the growth in most of the emerging markets world will continue at some point and the population will demand more of every commodity.  Thus, we see a bullish trend in the future for commodities.

Again, the wild card is the possible US Dollar devaluation which will make every worldwide commodity more expensive.  This could be another bullish factor for food/agribusiness companies for US Dollar investors.

There are many different ways to invest….

You could either choose one commodity holding which covers energy, food, and metals.  Or you could choose to hold them separately.   You can invest either through futures markets (using a futures broker, which is different from a regular broker).  Or you can invest in a stock market traded ETF which holds these for you.

Another way to be invested in commodities is to own the companies which produce the commodities themselves.  These might perform better or worse than the commodity, but you won’t have the cost of futures continually expiring.

As with the commodity futures themselves, you can buy ETF’s which are focused on a particular segment or you can buy more broadly allocated funds.  If you have any thoughts or questions on this or other topics, please let us know.

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