Investing in commodities

Commodities are, perhaps, the oldest investing vehicle in The World.

In ancient times there were no industrial indexes with thousands of stocks, but there were a lot of cattle, agricultural land and metals.

Investing in commodities history

The Bible tell us about the first speculator known in history, Joseph, who accumulated grain for seven years because he thought that tough times would come later. At that time, Joseph was the “speculator” and advised the emperor to accumulate big stocks of grains and commodities for seven years since he dreamed of future calamities.

This is how the speculator saved the people of Egypt and many other countries that did not “see” the future.

The “despicable” speculator made a lot of money without a doubt, but we should ask ourselves what would have happened if no evil speculator would have saved up the grains.

By the way, the only true money in those times was gold and metals. Fiat and paper money was not held in good regard since those people had better notions of economy than any economic scholar today, who believes that our current fiat system is the pinnacle of financial evolution.

Therefore, commodities have always been a favorite investing tool. After all, no investment is unaffected by commodities prices.

Besides, the commodity per excellence, gold, is not a commodity in fact, but money itself: the supreme natural order money.

Carl Menger reminded us of the essential utility of gold and how it came to be regarded as natural order money. The easiest way to see gold monetary function is to look at how gold production affects gold price.

All gold that has been produced is still present while the rest of commodities annual production is rapidly consumed. Gold lasts, the rest not.

However, gold is closely related with the economic cycles and therefore with commodities. But, contrary to the latter, and because of its monetary character, it is a “bullish” asset in both kondratiev´s winter and summer. While commodities are bullish only in “summer”, and bearish in “winter”.

Trading or investing in commodities?

The possibility of trading or investing in commodities is immense.

Perhaps, the most known way of “investing” in commodities is through the famous commodities futures, in which we can trade from oil to cattle and from metals to grains.

The main futures markets are in the United States, but there are also important markets in Asia and England.

Investing in commodities futures

The problem with futures is that we should not consider them as an investing tool for a long-term portfolio. Futures markets are very efficient for any imaginable hedging or short and medium term trading.

People do not, and should not, buy corn futures as an investment. If someone wants to invest in corn for the long-term, there are other possibilities.

Futures trading should be left to professionals and institutions that look for an “insurance”.

Besides futures, there are options, which are traded massively in the same markets, especially in the United States. Just like futures, options would be more convenient for trading purposes.

Investing in commodities stocks

The best way of investing in commodities is through investing in companies related to them, and therefore by buying and holding stocks. If we want to invest in oil we could buy Exxon, Chevron or BP stocks.

If we want to do it in gold or metals we could do it through gold mining stocks. In that sense, we should remember that the best investment during the Great Depression was gold mining stocks.

For instance, if we want to invest in grains, we could look for stocks that produce meat since meat production is related to grains.

The more expensive the grains are, there will be less profits for meat producers.

That is why meat futures and stocks like Tyson foods have risen dramatically last years, while the corn and wheat prices have collapsed.

Companies related to agricultural production may, however, suffer when there is a big bear market in corn, wheat or soy futures.

Investing in commodities ETFs

Another interesting way of investing in commodities is through ETFs, which cover practically all commodities. S

ome of them replicate more or less accurately the commodities overall sector, like DB Commodity Index Tracking Powershares. Incidentally, a good deal of those indexes is trading at minimum five year prices after the terrible commodities bear markets of the last years.

From a long-term perspective commodities offer interesting opportunities. Actually much better than when they were trading close to maximum prices in 2007 and 2010.

In those years, the interesting thing was to do bullish trading in commodities, but not investing. And, here there is the biggest difference between stocks and derivatives like futures and options. In the former you can do “trading” and investing, but its main characteristic is to be a vehicle for long-term investment. Futures and derivatives are more related to the trading business.

Other ways of investing in commodities

We can also speculate for the long-term (investing) or the short-term (trading) in commodities using other instruments that apparently have no relation to them.

We can, for example, “invest” in commodities through the forex markets indirectly by buying the commodity pairs like Australian New Zeeland and Canadian dollars, or even some exotic currencies that are very sensitive to commodity prices. Just look at the case of the Russian ruble and its major collapse after oil tanked 60% (Russia being one of the main world commodity producers).

By the way, I wonder how the Venezeualan Government is dealing with those oil prices now.

Investing in commodities Australia

The Australian dollar usually presents a strong correlation to commodity prices.

When commodities are bullish, it is bullish, and when commodities are bearish, it is bearish. For instance, we should expect that when a big bull market in commodities comes, the Australian dollar will rise significantly.

Investing in commodities vs bonds

Another way of investing in commodities is through the selling of bonds, or bearish speculation in the bond markets.

Under this theory, the best time to invest in commodities would be the kondratiev summer (seventies), when commodities had huge bull markets, and bonds had a multi-year bear market.

Meanwhile, commodities would be a bad investment in the next two phases of the cycle, autumn and winter (in which we are meant to be now), in which bonds are supposed to be the best investment along with stocks in autumn and gold in winter.

However, we have seen everything in this kondratiev winter, from dramatic collapses in some bond markets (Greece, Portugal), to huge bull markets in commodities (until 2007 and from 2009 to 2011), and devastating commodities bear markets (2008 and from 2011 to today).

The common characteristic of this kondratiev winter is extreme volatility.

The only bull market that is unaffected is the American bond market.

In short, I think that the best investment in commodities would be to become a producer, but it is something very difficult to do if you live in the first world and its uncountable regulations. Besides, the popularity of being a farmer is at its lowest ever.

The eras when prosperity was measured by the amount of land you had are over.

We have definitely entered in the plastic or virtual era, where the majority of people have not the slightest idea of how hard producing commodities is.