How to Invest in Commodities

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One of things all investors should know for 2013 is how to invest in commodities, as the prices of many of these products head for huge gains.

One of the reasons they will soar is because institutional investors have quickly abandoned them in the current risk on/risk off investment climate. There is right now roughly $424 billion invested in commodities, but that is a mere fraction of 1% of all global investment assets.

When all that money comes pouring back in, those commodity-related investments will skyrocket.

The few institutions that jumped into the market were disappointed because the commodities "super-cycle" did not generate spectacular gains for them in a year or two. Also, with inflation appearing to be nonexistent in the government-reported numbers, institutions are bailing on commodities.

For example, the giant California state pension fund Calpers last month slashed its meager 1.5% allocation to commodities to a miniscule 0.6%. It moved the money into the already bloated U.S. bond market, adding to its overweight position.

Just because institutions are short-sighted doesn't mean you should be. Keeping a percentage of your portfolio invested in commodities should help smooth out the effects of volatility.

With more and more central banks pursuing easy-money policies, currencies will fall and commodities will be more valuable to investors.

Also, keep in mind that emerging markets have not fallen off the Earth. They are still growing rapidly, and have a hunger for all sorts of commodities.

How to Invest in Commodities

There are two broad categories of commodities: hard and soft.

Hard commodities cover everything in the metals and energy areas including oil, natural gas, copper, nickel, gold and silver. Soft commodities include all the commodities that are edible including all of the grains, cattle, pork bellies, sugar, coffee, cocoa and orange juice. Cotton too is thought of as a soft commodity.

There are three ways investors can gain exposure:

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