it a good time to invest in commodities?
The simple answer: It’s always a good time
to invest in commodities. The most obvious reason for this is that both short
and long positions are allowed in the commodities futures markets. So, irrespective
of whether the price of a commodity is rising or falling, you can make money on
the movement, if you read it correctly.The big catch is that to make money, you
must ‘read the commodity right’.
Every commodity is determined by its own unique
demand and supply dynamics. So, for instance, the price of oil – the most
heavily traded commodity in the world – is determined by factors such as
economic growth (both at the global level and in major developed and developing
countries), the price of substitutes such as bio fuels, climate changes (a cold
spell in North America and Canada can pull the price down) speculation, and
production or stoppage thereof in the oil producing nations. The decisions and
guidance of the Organisation of Petroleum Exporting Countries (OPEC) also pay
an important role in driving the price of oil one way or the other.
The price of gold – another benchmark
commodity - is impacted by very different factors and sometimes by the same
factors but in a completely different manner. Like oil, growth and stability in
major world economies impacts the price of gold too. However, ironically, unlike
the price of oil, which increases with economic growth, the price of gold
reacts negatively; it usually soars when there are economic down-cycles and
falls when economic growth picks up.
Then again, while the short term supply of
oil can be easily augmented, the supply of gold cannot. So, a spike in the
demand for gold drives its price up much faster than a spike in the demand for
oil. Usually, inflation and currency movements (especially of the US dollar)
can drive the price of gold, while they are driven by the price of oil.
In a nutshell, tracking one commodity is a
completely different ball game from tracking another. And, unlike stocks, there
are no standard reporting formats (such as balance sheets and profit and loss
accounts) or company and industry ratios (such as PE, EPS, Debt: Equity, etc)
that can be applied and studied across commodities, in general, to arrive at
conclusions about valuations and potential price movements.Each commodity is a
unique animal that plays by its own rules. To succeed in commodity futures
trading, you will need to study, in depth, each commodity that you choose to
when to let go
While any time is a
good time to invest in commodities futures, you must be very clear about when
you need to disinvest. Your basic understanding of the commodities you invest
in will guide you with respect to this too. So, for instance, agricultural
products have very well defined seasons between sowing and harvesting. Taking a
call at any point of time is determined by how the seasons are expected to pan out.
Other commodities, like metals, which are more driven by industrial and real
estate cycles, are likely to depend on economic growth and relevant policy
announcements. Knowing what the triggers for various commodities are is the
key. More importantly, being able to gauge if a trigger will have the
anticipated impact, is what will guide you regarding whether you must stay
invested or let go.