Why Invest in Commodities?

Commodities have always been considered to be some of the most speculative investments. High leverage and volatility keep many individual investors out of the commodities market. While it may not be a good idea for entry level investors to dabble in the commodities market, there is still plenty of money to be made for people interested in commodities.

The commodities market is expansive and is made up of many different types of commodities, from the staples like oil and corn all the way down to pork bellies and beef, coffee and sugar. The commodities global market is open to practically any standard good. Oil from Texas is the same as oil from Alaska, pork from the United States is the same as those from Europe. Staple goods are staple goods, thus the market is able to categorize everything, even goods from different parts of the world.

Volatility is Common

Commodity prices are extremely volatile due to the fundamentals that affect supply and demand. Weak rainfall in the breadbasket of the United States will fuel a run in corn and soybean prices; ethanol subsidies created new demand for corn that pushed up the price. There are so many factors that alter supply and demand, and subsequently, the price points for commodities. Often, playing the commodities market requires the ability to predict geopolitical events.

Commodities are a Good Inflation Hedge

The ultimate reason for investing in commodities is as a inflationary hedge. When inflation runs rampant, prices rise and push up the demand for commodities. Each time a dollar, Euro or Rupee is created, the price for goods inherently rises, as there is more money to bid up the prices. Over the long term, commodities prove to be a great hedge against inflation and are easy to buy on the open stock markets.

Another reason to invest in commodities is to hedge yourself from other losses. Owning stock in an oil company will help you hedge the possible losses from the airline industry. Commodities offer just another market to diversify holdings and improve returns.

Buy Stock in Commodity Services

One way to play the commodities market is to buy stock in companies that produce, service, or ready commodities for the consumer market. For example, if you thought the price of corn would rise from $5 a bushel to $10, buying a corporate farm with large amounts of corn production would be a wise investment. Likewise, buying stock in an oil company should demand increase could produce significant returns on your investment.  Buying stock is much easier than buying into the commodities market through a futures brokerage account, and equities require less capital.

Another way to get into the commodities market is to invest in ETFs that are backed by a commodity. The exchange traded fund SLV tracks the price of 10 ounces of silver; buying into this index is as good as owning 10 ounces of pure silver. For gold, there is the GLD index, which represents 1/10 of an ounce of gold. This gives you the returns of commodities with the easy buying of stocks. Commodity ETFs are surging in popularity and available in most of the world markets.