Commodity Investing for the Medium Term

Commodity investing for the medium term, or 3-5 years is both interesting and chaotic. With economic recovery gearing up in most parts of the world, there is no question that the next 3 to 5 years will be an exciting, yet chaotic time for commodity markets. This is due to many factors, ranging from politics, to economics.  

What Will Influence Commodity Prices? 

A number of factors will play a part in the inevitable rise of commodity prices. Economic expansion is one the largest factors that will have an important impact. The BRIC countries, or Brazil, Russia, India and China, are dynamic and expanding very quickly. For example, China’s 8% annual GDP growth is rapidly demanding that the country consumes more resources. It also means that with economic expansion, a middle class will form who would want access to certain goods and services that are prevalent in the U.S. and Europe. 

Commodities, ranging from oil to power new cars, grain to feed beef cattle and chicken for consumption will rise in price due to increased demand. In addition, the expansion of commodities will push the precious metals industry to make more jewelry, which will in turn push the price of gold, platinum and silver. 

How to Take Advantage? 

There are many ways to take advantage of the rise in commodity prices. One way is by investing in companies that produce or deal in commodities, such as oil companies, agriculture or mining companies. Buying common stock that pays a dividend and holding it for a long time is an excellent way to build wealth. In addition, you can also purchase debt, also known as bonds. If the companies remain strong, then default risk is low.

Exchange Traded Funds (ETFs) are also a quickly growing investment tool. They invest in an index, such as the Dow Jones Commodity Index or the price of oil in dollars, not only providing diversification but also liquidity. Always remember that your investment strategy should reflect your financial situation and that you should consult with a financial advisor before investing.

What Does It Mean?

The commodities boom of the mid to late 2000s is just a preview of what is in store. With everything from a Chinese middle class, to the price of oil, to institutional investors needing to find their returns somewhere, there is no question that investing in commodities will surely become the hot item over the next 3 to 5 years. This will no doubt set the stage for another big run and possibly another bubble. 

There is much speculation about how big of a hand institutions have in influencing prices will become a point of contention with governments. Regulations will certainly tighten in order to avoid a repeat of the subprime mortgage market. Commodities, however, are governed by the laws of supply and demand. With the world population not only growing, but also clamoring for modern comforts, there is an excellent chance that one of the biggest investment stories of the decade will revolve around commodities.