Five Factors in a Constructive Strategy for Investing in Commodities

Investing in commodities is something that needs to be done within a constructive strategy to understands risks and opportunity. There are many factors to consider individually depending on one’s access, location and financial position. Five factors to consider are monitoring the market, monitoring supply and demand dynamics, diversification, long-term focus and dollar cost averaging.

Constructive Strategy Investing in Commodities Could Include:

1. Monitoring the market:

Stay up to date on the latest market developments and adjust your investment strategy as needed. Use the market to ease in and out of positions, take profit accordingly. Do not fall in love with a view or position. Commodities tend to overshoot prices. Look at a price chart of oil, natural gas, gold or copper as examples of this. (See chart below)

2. Monitoring supply and demand dynamics:

Study the market trends, economic indicators and factors that impact supply and demand of the specific commodities you are interested in. Keeping an eye on factors such as global economic growth, weather patterns, and geopolitical events that can impact commodity supply and demand. (See chart below)

3. Diversification:

Investing in a variety of commodities and commodity-linked financial products to spread risk. Spread your investments across different commodities and geographical regions to reduce the impact of price fluctuations in a single commodity or market. Consider both physical and financial investments: Physical commodities, such as gold or silver, can provide a hedge against inflation, while financial investments, such as ETFs or mutual funds, offer more liquidity and ease of access to the commodity markets.

4. Long-term focus:

Commodities can be volatile in the short-term, but over the long-term, their prices tend to rise with inflation. It’s important to have a long-term investment horizon and not be swayed by short-term price movements or broker and media obsessions. For Aluminum for example, Alcoa is the largest US Aluminum producer and it’s stock can be used as a proxy for investing in aluminum. Notice the price volatility and need to look long term but at the same recognize when to enter and exit your position. (See chart below)

5. Dollar cost averaging:

Investing a set amount regularly in a commodity index fund or ETF can help average out the cost over time. Consider investing a set amount at regular intervals to average out the cost of purchasing the commodity. Commodities can be prone to unique unintended events such as when oil went negative or the dramatic moves after Russia invaded Ukraine for grains such as wheat and corn prices. There are the so-called black swan events to consider. Dollar cost averaging takes out the emotion.

Commodity Prices Overshoot

‘Feast or famine’

With all these factors remember the most important; Understand risk and use caution with leverage.

Consider using leverage carefully, commodity futures and options can allow for leverage, but also increase risk. It should be used with caution and in accordance with investment goals and risk tolerance.

Trade and Invest Smart!

From the TradersCommunity Research Desk.