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A commodity is something that has universal definition and demand.
Everyone knows what food is, and everybody wants it.
Nearly everyone in the world knows what gold is, and nearly all of them want it. The same is true for oil, steel, copper… the list goes on.
In short, commodities are always in demand. The benefits of commodities are permanent and tangible. They aren't a service, or the latest gadget that's hot one day and cold the next.
And, as the U.S. economy continues to stumble, exposure to commodities is more important now than ever.
Read on to discover why commodities should be a part of your investment portfolio… and find out exactly how to build your wealth through commodity investing.
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Why Invest in Commodities
Commodity investments tend to do best when more-traditional investments (like U.S. stocks) are doing poorly, and when economic conditions are less than ideal.
There are a few factors at play right now that are pushing commodities higher:
- The U.S. dollar has been falling hard and fast. As a result, investors are seeking safety in gold and silver. Accordingly, prices for the metals have eclipsed records.
- China projects its economy will grow 10% every year for the next decade. To do so, it's gobbling up iron ore for new skyscrapers and cars, and buying coal and oil to heat homes and fill gas tanks. It's buying so much, in fact, it's single-handedly driving up prices.
- Bad weather in North and South America and Asia are ravaging supplies of corn, wheat and rice, driving food-price inflation around the world.
And according to renowned commodity market expert Jim Rogers, a number of wild cards are still shaping the commodities market. This bull market in commodities may have a lot more room to run than its typical predecessors for three reasons:
- Global Infrastructure Spending: The Organization for Economic Cooperation and Development (OECD) estimated that worldwide investments in power generation, water and transportation infrastructure projects would exceed $40 trillion by 2030. And that was before countries around the world enacted hundreds of billions of dollars in stimulus spending programs.
- Improving Worldwide Living Standards: About half the world's nearly 6.8 billion inhabitants are simultaneously pushing to improve their living standards, a fact that by itself stands to create a commodities demand-shock never before seen – enough, in fact, to extend the secular commodities bull by five additional years.
- Modernization Efforts in Major Markets: The modernization initiatives in China, India, South America, Eastern Europe and other portions of Asia are extremely bullish for commodities prices.
These forces will likely send commodities prices, and overall inflation, higher – well into this new decade because they aren't readily reversible, according to Money Morning's Global Resources Specialist Peter Krauth.
What about Supply?
Today's demand for commodities, whether it's oil, wheat or gold, is outpacing supply – by a widening margin. Basic economics says that prices must move higher to compensate.
And the problem will only get worse as young economies demand an increasingly larger piece of the pie.
As if that wasn't enough, consider that the world is still running on metals deposits found in the 1970s (or earlier).
Spellbound by higher prices, miners have been pushing every last resource toward ripping them from the ground – rather than looking for new sources.
Companies that can keep the metal coming out of the ground, despite the global supply shock, will have virtually no limit to profits. They'll earn the ever-fattening spread between the amount it costs to pull the raw material out of the ground and the amount the market will pay for it.
Such has been the case for coal, aluminum, iron ore and copper miners – as well as oil producers – who have been making a killing on demand from China, home to the world's largest manufacturing base and the world's largest middle class.
Commodities Investing 101: Mutual Funds and ETFs
If you want an automatically diversified approach, there are scores of mutual funds in the resource sector available. However, that's only a starting point.
Each fund has different holdings and a unique focus. And researching each fund will allow investors to become more familiar with individual commodities companies and what they do.
Mutual funds also have varying risk levels and investment minimums. Make sure to consider both before buying.
Mutual funds buy into commodity-producing companies.
But exchange-traded funds (ETFs) and exchange-traded notes (ETNs) provide investors with more direct exposure to commodity prices. Though ETFs and ETNs trade like stocks, their risk level is far lower, and their price movements more conservative.
The broadest commodities exposure you'll find among the scores of ETFs and ETNs available is probably through the ELEMENTS Rogers International Commodity Index Total Return ETN (NYSE: RJI). Based on the index built by Jim Rogers himself, RJI is comprised of 34.9% agriculture, 21.1% metals, and 44% energy.
Another viable option is the PowerShares DB Commodity Index Fund (NYSE: DBC). While less diversified – with 22.5% agriculture, 22.5% metals, and 55% energy – it boasts large trading volume.
You can also get exposure through ETFs that focus on individual commodities, including agriculture, coal, and steel-related companies.
Van Eck's Market Vectors' suite of ETFs is a great place to start looking, and a standout among them is its Market Vectors Agribusiness ETF (NYSE: MOO). As its name implies, this ETF seeks to track the performance of the DAXglobal Agribusiness Index, which is comprised of companies that derive at least 50% of their revenues from agriculture-based businesses.
The Next Level: Stocks and Bullion
If you prefer stocks, the number you have to choose from is even more abundant. Some are speculative plays such as small, penny stock mining companies. Some are commodity-specific – such as a company with one primary product, like natural gas or silver. Some are blue-chip behemoths with a full roster of in-demand products.
The best example of the latter is Australian mining titan BHP Billiton Ltd. (NYSE ADR: BHP).
BHP Billiton has $140 billion in total resources, making it the largest diversified mining company on earth. With an enviable balance sheet and cash flow, this producer of base metals, precious metals, diamonds and energy is way ahead of the pack.
As far as oil company stocks go, there are plays for investors at each risk level. Low-risk investors should check out Texas oil titan Exxon Mobil Corp. (NYSE: XOM).
Investors who can handle a medium risk level might want to look into EOG Resources (NYSE: EOG), another Texas-based oil producer that explores, develops and produces oil and natural gas.
A more speculative oil play is Canada's BlackPearl Resources Inc. (PINK: BLKPF), which holds oil and oil sands assets in Western Canada. As a pink sheets stock, this is a riskier investment, but it could be worth it if you buy in at the right time.
Expanding past the oil producers market, there's one oil stock you should know about. It's an oil refinery that's currently sitting on a major profit gusher. To learn more, click here for a new special report.
You'd be wise to get some gold exposure too. Gold miners are an excellent hedge against the enormous inflationary pressures now hitting the U.S dollar. And they're a great profit generator, as well.
In this case, the Market Vectors Gold Miners ETF (NYSE: GDX) – composed chiefly of major gold miners – offers both company and geographical diversification, while including substantial leverage to the price of gold. GDX is based on the AMEX Gold BUGS Index (HUI), which represents a portfolio of 15 major gold mining companies that do not hedge their gold production beyond a year and a half.