How to invest in commodities

Commodities are a very hot theme these months (2011) and therefore there are a lot of questions in style “How to invest in commodities?“. They are experiencing a huge rising uptrend and a lot of commodities generated huge gains for commodity investors. And there is very strong public opinion that they are one of the best ways to invest money.

But my personal opinion is that commodities are not so good for buy-and-hold long-term investment.

Commodity ETF long term chart

There is one fundamental reason to avoid long term holding of commodities in your portfolio. I done a great deal of research for my Global macro research notes regarding this issue.

And it is that when the price of some commodity reaches a very high level, then it allows for the development of alternatives. And as these alternatives are improving over time, then they can start to replace a former commodity.

Can you imagine that we seriously discussed electric vehicles like cars 10 or 15 years ago? Only as a very strange option and may be more like an idea from a science fiction book. But today (2011) there are already several different models of electric cars developed. They are not heavily produced but some of them are already being tested and I expect that we will use electric vehicles in coming years. Rather sooner than later.

And such development is very bearish for oil. The price of oil depends on its usage for cars. What happens when demand for oil declines by 50 % or more?

It is wise to use commodity etf shares for short term and mid-term trades

But this does not mean that we should avoid investing or trading commodities in the shorter time frame. Swing trading or position trading/investing using commodity ETF shares could generate nice profits for your portfolio.

Here is an example of how to use the Natural gas ETF to realize one of my global macro strategies I also apply to my position trades portfolio.

Another list of examples for developing a commodity ETF investing strategy is described for iShares gold ETF and iShares silver ETF shares.

So my reply to the question “How to invest in commodities” is often that they are good for mid-term or short-term but not for long-term buy-and-hold investment.