Commodity Trading – The Next Profit Center?

With the rapid sinking of the US dollar relative to other foreign currencies, investors who can read trends and are students of history are looking for ways to make their capital grow.  Housing and esoteric debt products have burst the way the stock market bubble burst in 2000, and the normal business cycle may have turned into a cycle of repeating bubbles, with strong inflationary trends.

As always, the process of investing is one of making carefully researched bets on things – selling assets when they've appreciated in value and buying those you think will rise in time.  With the declining dollar, and risks of a recession, coupled with the Fed cutting the prime rate to banks as part of a staged bail out of the mortgage crisis mess, the trend lines make commodity trading appealing.

Commodity trading is simply buying commodities (such as gold, or silver or platinum) as a tangible asset.  When inflationary pressures are strong (and interest rates are low), these can give a better return on investments.  For example, in 2003, oil futures were trading at $25 per barrel; now they're trading at roughly $95 to $100 per barrel. 

When you buy commodities, you are generally buying a piece of paper saying you own something and have the right to re-sell it, rather than taking physical delivery of goods.  This can cause commodities markets to be quite volatile and subject to events in the world – for example, oil went up when the US invaded Iraq; it went up again when terrorists were caught in the Saudi oil terminals…and right now, while oil is priced very high, there's also lax capacity at the refineries in the US, which is a strong indicator that oil's current position is a speculative surge.

Other commodities to look into for trading are precious metals; when inflation hits (and we're in the process, with the Fed cutting rates, of starting an inflationary spike), precious metals tend to be one of the major categories of investment that's gains outstrip the rate of inflation.  However, like oil, there is a severe risk of a speculative bubble, as happened in the early 1980s with the Bass brothers and the silver market.

Lastly, the environmental crises being touted in the media and the demand for "green" biofuels are causing a huge surge in the price of corn, where the subsidies for planting corn for making ethanol for E85 gasoline outstrip the price of growing corn for crops by a factor of four.  While this is going to cause rises in prices for food (a major drive of inflation), it also means that commodity trading in corn, soybeans and other agricultural crops is a viable investment.

The general advice in commodities trading is that when your asset reaches the price point you want to sell at, sell at least half to realize your gains, and sell off the other lots over the next two weeks in chunks of 5 to 10%.  Like a high stakes poker game, commodity trading rewards those who know when to leave the table rather than be held to the siren lure of the ever growing pot.