Wednesday, August 13, 2014

Commodities For Investing or Trading?

Ben Carlson is the fantastic author of A Wealth of Common Sense. He just wrote an article titled, "Are Commodities For Trading or Investing", which is exactly the topic that I would like to share my thoughts on.

He came up with a beautiful table for the returns of the 2 popular commodity indices, as well as comparing them to the returns of the S&P500 and cash (T-bills).

As you can see, commodities as an asset class slightly outperformed cash on a total return basis, but only managed to do so with MASSIVELY more volatility. This just means that they roughly end up in the same place, but with much much bigger swings to the upside, as well as the downside.

Comparing different time periods, it is quite evident that commodities swing left, right, up, down and center. So, what does this mean?
"...commodities are really just materials and input costs. They don’t pay dividends or generate earnings like stocks. They don’t pay income like bonds."
Contrary to popular belief, I think commodities are actually the easiest asset class to trade. Commodities have intrinsic value, and like Ben Carlson points out, they don't generate earnings, pay dividends or grow like stocks, neither do they pay out coupons like bonds. Commodities just is as is, plain and simple.

Being plain and simple makes things easier. Investing in every asset class in the simplest form is exactly the same, you buy low and you sell high. Wash, rinse and repeat. Add that to the known fact that your asset class is wildly volatile, you now have plenty of opportunities to buy low and sell high. This is one asset class where you actually might want volatility, since it would improve your returns if you understand the necessity of it and can act upon it.

All you have to do is look for commodities when you think that they are relatively cheap, then you just sell them later on when they are relatively expensive. Look at the chart below. Does this look like an investment that is hated, unloved and cheap now?

This is from Tiho at The Short Side of Long, and I am always very impressed with his finds, being able to locate highly possible turning points in the big picture.

Tiho thinks that agricultural commodities may be ending it's bear market now. I just think that commodities look cheap. I have been in and out of Corn, Cotton and Soybeans the past week and I have been making some small profits while also getting paid interest to take long positions against the herd.

Anyway, the main point of this post is for me to share my opinions about commodities, not my recent trade history. I do not think that a basket of diversified commodities is appropriate for long-term investors to buy-and-hold. Commodities ought to be looked at individually and bought and sold based on relative price.

Gold and Silver is different though, since they are monetary metals. Or maybe I'm just saying it because I am biased towards the precious metals, haha. Well I do have my reasons for finding precious metals an attractive investment now.

Any thoughts on long-term investing in commodities?

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