Dear long-term investor, investing in commodities is an interesting market. A market characterized by strong cyclical movements. This can lead to years of capital losses, only to rise to new record highs within a few years. This makes investing in commodities volatile, riskier, but also potentially very profitable.
In this article, you will learn the crucial basics for successful commodity investing. From commodity stocks to commodity funds. We also take a closer look at some interesting themes that show the beginnings of a bull market.
On to sustainable success!
Table of contents
Investing in commodities is a business in itself. More than shares in companies, commodity shares are partly driven by supply and demand from a macro-economic level. A new political regime can slowly erode one energy sector (oil) to make room for another energy sector (clean energy). Technological breakthroughs, such as the car (oil) and later the electric battery (lithium), can give raw materials an enormous boost. And of course, other (social) factors play a role in investing in commodities.
In general, investing in commodities has 5 categories:
Investing in commodities has a strong cycle. This is both the biggest advantage and disadvantage. In a short period of time, these cyclical assets can rise to new record heights. The increase in the price of a commodity also leads to more production.
If the oil price increases by 50%, oil companies will produce more. If political policies around the world place more emphasis on nuclear power plants, uranium mines will produce more (again).
During the copper "rally" between 2003 - 2008, copper shares of Freeport-McMoran rose +550%. And more recently from 2020 - 2022 by +675%!
The main advantage of investing in commodities is that it is cyclical. Very high returns can be achieved in short periods of time. On the other hand, the biggest disadvantage is that investing in commodities is sometimes in a bear market for years.
Those who step in at the wrong time lose 90% of their money over sometimes as long as 20 years!
The moment of entry is of great importance when investing in commodities. This is for advanced investors.
The best long-term investors stay close within its core competencies. They invest in stocks they know inside out. Of which they can determine with certainty that those stocks (1) have a favorable price and come from (2) strong companies with (3) reliable management and (4) that operate in a growing market.
Is investing in commodities wise for the long-term investor?
Yes and no.
Investing in commodities has an advantage over stocks. Commodities usually have little or no correlation with the shares of companies. Commodities can go sky high, while other companies are heading for bankruptcy.
For the sake of diversification, we would like to invest at least a portion in commodities.
However, it is true that this is a profession. And we must stay close to our knowledge to be successful.
An alternative is to buy knowledge. For example, we, Happy Investors, are an official partner of Capitalist Exploits. This team of hedge fund managers manages $100 mln in assets. They do full-time research on asymmetric investments such as in commodities. Thanks to their research, we have already made good returns. And this is just the beginning. 2022 seems to be an extended bull market for commodities. We see this in almost all commodity stocks, such as Freeport-McMoran.
Click on the banner to learn more about Capitalist Exploits' research.
There are several ways how to invest in commodities, namely:
How to invest in commodities depends on your knowledge and experience. The best way depends on this as well. In general, small cap stocks, such as junior gold mine stocks, offer the highest chance of exponential returns. They have a small market capitalization and from that position, if the commodity market picks up strongly, they can grow exponentially. This means x5, x10 or even x100 returns.
Below we will take a closer look at some of them.
The biggest advantage to why buy shares in commodities is because of the explosive price increases in a short time. When demand for a commodity picks up, the underlying value will increase sharply in a short time. This leads to production companies of this commodity also becoming exponentially more profitable in a short time.
Suppose. Royal Dutch Shell produces a barrel of oil at an all-in cost of $100. At an underlying value of $110 per barrel, Shell grosses $10. Now an event occurs. Like the corona crisis. Supply and demand decline rapidly in a short period of time. The stock price implodes. After covid-19, demand increased rapidly, but supply cannot increase equally rapidly in a short time. Consequence: demand exceeds supply, causing the underlying value of one barrel of oil to rise. Suppose this rises to $150 a barrel. Now Shell makes not $10, but $50 gross profit per barrel. This is +600% profit increase. The result: the stock price explodes.
The corona era was a unique event with rapid declines and increases in commodities in a short time. And disadvantage in buying shares of commodities is that they can be in a bear market for years. A good example of this is Uranium. This persists for a painfully long time, until demand increases rapidly in a short period of time. We see this with shares of Cameco, one of the largest uranium companies in the world.
Why buy shares of commodities? Because they can realize a lot of price gains in a short time thanks to cyclical movements at the macroeconomic level.
Want to know what the best commodity stocks are right now? Read our research on the best stocks for 2022 here.
In addition to stocks in commodity companies, we can also offer long-term investing in ETFs. However, we have seen that investing in a commodity ETF is not interesting. Cyclical market movement can cause a commodity ETF to be in the red for years. This is exactly not what we want as ETF investors. We want to build sustainable wealth thanks to a lot of risk diversification in stocks.
Investing in commodity ETFs works in a similar way as commodity shares: market timing is very important. The advantage of an ETF is that it spreads risk. In this case, you can focus on the entire sector of one commodity. This is wise when you are sure of increasing demand, but uncertain about which stocks (companies) will benefit the most from this.
Investing in commodities is best done in stocks. Not in an ETF. Again, this has to do with our level of knowledge. The circle of competence. As with any investment, investing in commodities works best when you have a lot of knowledge about them. And those with a lot of knowledge will see greater opportunities in individual stocks than a commodity ETF.
Anyway: for novice investors and young investing, a commodity ETF is the best start. And after that, we believe it is wise to gain as much knowledge and experience as possible within the cyclical world of commodities.
Outsourcing is an alternative. If you do not have the necessary knowledge, it is better to hire it. After all, we do this with everything: from a plumber to surgeon. Why not invest in commodity funds? In this case, you can potentially enjoy price explosions, without risking yourself to years of bear markets.
Commodity funds have advantages and disadvantages. First, it is more expensive than doing it yourself. But that's okay if they perform better. This is just not always the case. Therefore, it is very important to choose the best commodity funds. Those with a proven track record of consistently higher than average returns.
As indicated, we think Capitalist Exploits is one of the best commodity mutual funds. Within its Insider membership, they look for asymmetric investments in commodity stocks that can rise exponentially. And so far with great success. We also see this reflected in our own returns.
Want to know more about this commodity mutual fund? Read the full Capitalist Exploits review.
As indicated, investing in commodities is primarily looking at a macroeconomic level. What is happening in the world? Are there political currents that favor certain commodities? Technological breakthroughs? Social trends? Et cetera.
As long-term investors, we look ahead. We invest in shares of companies and/or commodities that have an increasing demand in the long term. In our view, the demand side is most important. In some cases, declining demand can also be interesting. We see this in the case of coal mines, for example. Coal as a raw material has been declining for years from Western Europe. But in countries like China and India, coal is still very much needed. The closure of coal mines in Western Europe can actually lead to an increase in demand for the remaining coal mines elsewhere.
Clean energy has been an expensive commodity for many years. High production costs made investing in clean energy unprofitable. Thanks to unprecedented technological advances, in a relatively short period of time, production costs have fallen hard.
By 2022, clean energy is not only sustainable but also economically viable. There is a lot of political encouragement for clean resources. And consumers would rather be sustainable than pollute. In conclusion, clean energy is the future.
As long-term investors, we consider clean energy the best commodity today.
Since 2012, the industry has seen a downward trend in capital investment. Production capacities have declined sharply. A major global shortage seems to be at hand. As of 2020, people are starting to wake up. Copper is in a new bull market. Demand for copper continues to rise, and the industry must keep up at a rapid pace.
In the short term, copper shares may rise rapaciously.
Like any commodity market, the uranium market is cyclical. But it is a market where the commodity itself is even more volatile than other resources, as it is only a tiny part of the cost component of nuclear power. The impending supply shortage promises to reward us richly when the market inevitably revises prices.
This effect may be amplified by the need for clean energy. Renewable resources such as solar and wind power are unlikely to be enough to meet climate targets. Investing in hydrogen may be promising, but this industry is still in its infancy.
Uranium stocks can rise very quickly in the short term. The upward trend of 2021 is likely to continue.
Within the Insider membership, you get instant access to a basket of stocks for uranium, copper, oil, shipping, agriculture and many other themes.
In the short term, the demand for oil will continue to rise, while the supply takes a (deliberately) stable turn. Oil as a resource seems depreciated in the long run. The world is fully committed to clean energy. However, the reality is that oil is essential in the short term. The transition to clean resources will not happen fast enough. Oil is simply needed to fuel economic growth.
Finally, we have agriculture. Virtually no one looks at agriculture. Let alone investing in commodity stocks within agriculture. A boring sector. But one that is vital to humanity. Without agriculture, no food.
There are a number of factors that could cause agricultural commodity prices to rise significantly in the coming years. Among these factors are the effects of monetary softening as central banks fight to save economies from the effects of the covid-19 closures, supply chain disruptions due to border controls and other government policies, and free-market interventions that lead to shortages.
In addition to the commodity stocks mentioned above, there are other sectors of interest. Investing in commodities promises to be an interesting period. Getting in now can lead to nice returns for the next 3 - 5 years.
Continue reading our blogs on commodity investing for more inspiration and knowledge.