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Commodities aren’t for everyone, as they can be tricky investments.
But for individual investors willing to learn the basics and accept volatility, a judicious allocation can make sense. This can diversify traditional portfolios of stocks and bonds, hedge against geopolitical risk and protect against sustained inflation.
Yet buying at the right time is critical. This is a satire, but it illustrates the mercurial nature of commodity price movements and the importance of investing tactically. Though this satire naturally is far-fetched, it nevertheless demonstrates the mercurial nature of commodity price movements and the importance of investing tactically.
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Copper is king — and oil’s a bellwether, too
Chief among indicators is copper. Copper is a highly conductive metal that has been a leading indicator of the metals sector and commodities as a whole. It’s also known as Dr. Copper, as though it were a metal with a doctorate in economics, because its performance is often predictive of shifts in domestic and global economic output.
Copper is used in myriad consumer and industrial products — a range that’s expanding with the electrification of everything from lawnmowers to toilets, the rise of electric vehicles and the growth of solar and wind farms. Increasing demand for copper tends to precede rising sales of a broad range of products and, to some extent, economic growth.
Prices hit a 20-year high in late 2021 and then fell sharply. In July, copper spiked up substantially from this year’s May low, and though wavering since, now seems poised to trend higher in the coming months, barring a significant downside catalyst such as a recession (widely predicted for more than a year now but showing up with the punctuality of Godot).
Current strong copper forecasts reflect positive outlooks for companies that mine and process other metals and minerals used in EV batteries, including aluminum, lithium, cobalt, manganese, nickel and iron — and for industrial materials in general.
Another bellwether for the entire commodities category is crude oil. As of mid-August, 90% of S&P Energy stocks were above their 50 day moving average. There is still room for growth. Crude started off on the wrong foot during the pandemic, but then began to rise in early 2022. It reached pre-pandemic levels before falling below late-2019 prices the rest of the season, again tempered by recession fears. In mid-August, benchmark West Texas Intermediate (
) completed seven straight weeks of gains, reaching $84.89. The current scenario is one of a crimped supply with sustained high demand. Thus, the current scenario is one of crimped supply with sustained high demand.While copper and oil are key indicators for the commodity markets overall, following them is of course no substitute for researching specific commodities.Beware of some commodities pitfalls
Investors who don’t know a pork belly from a slab of bacon should be prepared for a steep learning curve — and potentially painful pitfalls. They should be aware that:
Investing in commodities — whether hard (mined or extracted) or soft (grown or raised) — is much different from investing in conventional stocks. By purchasing shares, investors are buying a long-term investment in a company, while commodities expose them to immediate trading pressures due to ever-changing global supply and demand scenarios for metals, crops energy, livestock, forests products, etc. Momentary speculation can cause prices to be whipped around by intense market movements. As with any investment, it is important to look beyond the short-term fluctuations to factors that could indicate a sustained trend. Many people confuse futures and options, which only give the right to buy or sale the underlying asset. By contrast, futures contracts are an obligation.
Exchange-traded notes aren’t direct investments. ETNs, on the other hand, are debt instruments that are backed by their issuer. Investors must understand not only the dynamics of the underlying commodity, but also their issuer’s financial situation, which includes the ability to pay for carrying costs, in this case, the rents of silos, until the sale. When storing corn for months, the owner is essentially speculating that the costs of doing so will be less than the increase in the market price of corn over the holding period.
Considering ETFs and stocks instead
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- Instead of ETNs, most individual investors are usually better off making direct investments through exchange-traded funds — preferably, those without substantial exposure to futures. Examples currently worth a look include VanEck Natural Resources ETF (HAP), offering substantial exposure to energy and materials, and VanEck Agribusiness ETF (
), with substantial holdings in agricultural products and services. For those prepared for futures exposure, Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (
) has holdings in various heavily traded commodities.Individual stocks to consider now include: Southern Copper Corp. (SCCO); Freeport-McMoRan (FCX
), copper, gold, molybdenum and silver; Chevron Corp. (CVX); Schlumberger (SLB), oilfield services; The Mosaic Company (MOS) and CF Industries Holdings (CF), fertilizer; Deere & Co. (DE), farm machinery; and Archer-Daniels-Midland Co. (ADM), agricultural storage and processing.With commodities, investors should be prepared to shrug off dips that may occur soon after purchasing. Decisions to buy should reflect the conviction necessary to hold amid volatility.— By Dave Gilreath, certified financial planner and partner/CIO, and Seth Hickle, derivatives portfolio manager, Sheaff Brock Investment Advisors and its institutional arm, Innovative Portfolios