Ever since the financial markets went into meltdown, commodities have been a hot topic. Commodities represent to many investors a safe haven. Here are physical assets that can’t’ just evaporate away, like a company stocks. But investing in commodities is by no means a straightforward affair. There are plenty of issues in this market too, which is why until now it has remained so specialist. The following is an assortment of tips from industry experts on investing in commodities.
Beware Exchange Traded Funds
Many people get into the commodities market because they want something tangible in their hands. They want “real” wealth; they say to themselves. But the problem is that most investors can’t actually hold physical commodities, precious metals aside. That means that they have to hold some sort of derivative, like an exchange traded fund. And, of course, exchange traded funds are risky. They can be leveraged up to the max, without any underlying asset supporting their price.
Be Picky About Weight
Commodities are traded by weight. But different scales have different test weight tolerances. If you’re buying something with a high value per unit weight, it’s important to make sure the scales are calibrated. Incorrectly calibrated scales can lead you to get less than you bargained for.
Take Indirect Positions
A lot of investors believe that they have to buy commodities themselves. That is, they have to buy the raw material. But there are alternative ways that you can invest your cash in commodities. For example, there’s been a lot of buzz about investing in silver mining companies recently. Why? Because the silver miners are going to have to expand mining production as world silver demand grows. This is going to make the miners more valuable as companies, all because of the price of the commodity. In other words, investing in a silver company is an indirect way of investing in silver itself.
Not All Commodities Are An Inflation Hedge
There are a lot of investors piling into commodities right now as an alternative to cash. Why? Because they expect inflation in the future to erode the value of their money holdings. Right now governments are sitting on mountains of debt. And this debt is going to have to be paid off somehow in the future. It doesn’t look like it’s going to be paid off through regular taxation; the numbers are too high. Instead, it looks like it’s going to be paid off by creating money. Some commodities track inflation very precisely over the long run, like gold. But there are some that don’t track it well at all, like zinc or lithium. If you’re looking for an inflation hedge, you need to choose the right commodity.
Don’t Neglect Your Position
Commodity prices are notoriously volatile. They tend to go up and down in a more extreme manner than company stocks and shares. And so it’s vital that investors monitor their commodity position regularly. It just won’t do to check it once or twice a month. Commodity investors need to be analysing their position every few hours. Sometimes only the slightest bit of bad news can dramatically affect commodity prices.
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