Navigating The Crazy Commodities Market


Image by: Fang Guo
By Steven Morrison II

A well-balanced portfolio should include some commodities, whether as direct futures contracts, exchange-traded funds (ETFs), exchange-traded notes (ETNs) or just simply good old-fashioned stock in a company that deals directly with commodities.

The problem is that commodities are all over the place in terms of prices, markets and and any sort of predictability. They can be very risky as many many factors can take the price in any direction at a moment’s notice.

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Right now, it seems that most commodity prices are rising, as demand continues to outpace supply, in most cases. However, a smart player can work the commodities game to his advantage, reaping the benefits of smart bets.

How about some specifics? We talked previously about silver being hot over the next year and it still is. Morgan Stanley is high on agricultural staple cotton for the rest of this year, as are many others. And gold? You already know about gold. But has it peaked? Maybe. That one is all you.

Morgan Stanley also sees aluminum seeking a double-digit increase this year (maybe prices will get so high that we’ll see a few custom-fitted suits pushing shopping carts full of cans down the road).

Other experts say that palladium prices are set to soar to heights previously unseen, much like palladium itself (I’ve never seen it, have you?).

A quick refresher on three ways to participate in the commodities market so you can get while the getting’s good:

ETFs & ETNs

These super-complicated financial products offer some of the pay-out of futures contracts without actually ever buying anything. The most modern way to participate.

Futures Contracts

These promises to buy a specific amount of a commodity at a specific price on a certain date in the future are susceptible to INSANE price fluctuations. You can also form a commodity pool operator and buy futures as group, “pooling” power and resources (and hopefully profits).

I once got a summer job working as a lifeguard at a commodity pool. Thanks I’ll be here all week.

Stocks

One great thing about stocks in companies that deal in commodities – they are not prone to follow the price fluctuations like a futures contract so therefore they do not offer investors as much of a Mr. Toad’s Wild Ride-like experience.

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