Topic: Energy Stocks

Commodity Investments: Trade Commodities or Buy Commodity Stocks?

Commodity prices are down lately along with fears of lower demand due to a slowing global economy. That makes them a tempting investment for some investors bracing for a rebound.

We like the long-term prospects for commodity investments, including metals and minerals, fertilizers and agricultural products. However, most if not all non-professionals who get involved in commodities trading wind up losing money.

There are various structured products sold by brokers that give you exposure to commodity investments, while limiting risk. Most participants will ultimately lose money in these investments as well, or make a poor return in relation to their risk.

The difference is that the losses won’t happen so quick; in addition, more of the funds lost will flow into brokers’ fees and commissions, while less will be lost on the commodity investments themselves.

We feel that investing on the basis of price changes for commodity investments instead of in commodity stocks is more of a gamble than an investment. These activities don’t earn dividends or interest, but instead consume income for storage fees, insurance and so on. You also don’t profit from the buildup of capital that you get through investing in stocks and some trusts.

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You can only profit in futures-linked deals by out-guessing other futures traders, by a wide enough margin to offset commissions and other trading costs, plus MERs. When you dabble in commodity futures, you are betting against professionals who make a full-time occupation of studying these markets, who have better access to information than you do, and who pay far lower commissions.

One more general rule: if people generally believe the price of a commodity is sure to go up, the reverse often happens. That’s because suppliers and users of the commodity also read the newspapers, and they both take steps to protect themselves and profit from the situation. The suppliers try to increase supplies, and the users try to become more efficient or find alternative commodities.

Most future traders start out with a planned limit on how much they are willing to lose before they quit. In six months or so, most lose that amount, and quit trading. A surprisingly large number find that the total brokerage commissions you pay during a trading career is close to your total losses. You are likely to break even on your trades overall — disregarding commissions — because futures traders tend to trade a lot, and the outcome of any given futures trade is a random event.

We think the best way to invest in and profit from growth in commodity investments is by investing in commodity stocks. Commodity stocks are shares of well-established companies that will benefit from a rise in price for commodities. With these commodity stocks, you can benefit from the increases in commodity prices while at the same time saving on the greater brokerage fees and commissions associated with other types of commodity investments.

Examples of commodity stocks we recommend include Imperial Oil, Teck Cominco, Agrium, BHP Billiton and Alcoa.

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