In 2008, commodities of all types saw record highs across the board. Since those midsummer highs, commodities fell off a cliff at a much faster pace than most global markets. But as the U.S. markets hit lows March 9 of this year and subsequently rallied through mid-May, commodities are showing tentative signs of recovery as well.
Less than five years ago, commodities were not easily accessible for retail investors. This is because managing futures contracts can be tricky for anyone who is not a big-time institutional investor; buying is expensive and unwieldy. Exchange-traded funds (ETFs) have since leveled the playing field for everyone. And now if you want exposure to commodities, it’s as easy as having the desire to do so.
And despite the correction, commodities have remained a point of interest for investors. That’s because the planet still has a booming population with which to contend, and its new inhabitants are going to want to eat. They will also want transportation that requires oil, gas or natural gas. Plus, there could come a time when market fears will send them running for gold.
The fundamental linchpin with commodities is whether we will see inflation, and if so, when it will materialize. Global markets appear to be addressing their problems; they have a plan, and investors are starting to appear more confident. With the huge increase in global money supplies, at one point we will see inflation again, and it should bode well for commodities.
But the area of commodities is its own asset class with its own rules, risks and trends. Although ETFs make it easier than ever to play commodities, all should take care to educate themselves before diving into this exciting but specialized area.
GETTING ACCESS TO COMMODITIES
For many types of commodities, there is often a correlating ETF that traders can access. These ETFs differ in their construction: Some hold the stock of companies that produce these commodities, others hold futures and some even hold the actual physical commodity—relieving traders of the hassle of storage. I will touch on the most popular commodity types and their corresponding ETFs.
Energies: Oil and gas prices have garnered their share of media attention and water-cooler conversations in the last year. Crude oil hit a record $147.27 per barrel in July 2008 to the dismay of many consumers. Gas topped $5 a gallon in some areas of the nation at that time. Even though these prices have come down to less stomach-churning levels, many are watching these prices for an eventual rebound as the world’s population continues to soar.
Energy is a particularly risky area in which to invest, as its prices are hypersensitive to many unpredictable events. Global unrest, a shaky political climate and disastrous weather...