In times of instability in the financial markets, there are many options that investors can choose to make their available capital profitable. One of the most relevant at the moment is that represented by raw materials since in some cases they can act as a refuge value in the face of the fluctuations of the equity markets around the world. Some of these proposals may have an appreciation potential that can approach levels very close to 40%. You just have to know the moment to take positions to move the money.
Raw materials is of course a very diverse financial asset and where many products come into play. At the end of the day it is a good that is transformed during a production process until become a consumer good. There are some material goods that cannot be used directly by consumers since they need to be transformed (oil for example). Raw materials are the first link in a manufacturing chain, and in the different phases of the process they will be transformed until they become a product suitable for consumption.
On the other hand, it must be emphasized that the world of investment is also known as a commodity. This is the name by which it is best known by small and medium investors and that in a way indicates a way to invest money in these financial assets. To the point that commodities is one of the financial assets with the longest tradition in the world of investment. With relevance that is reflected in the fact that they are listed on their own financial markets. Where they come from food, such as wheat, coffee or soy to one of the most important financial assets at the moment such as oil. In this sense, it can be said that it is a kind of mixed bag.
Raw materials: profiles to invest
Of course, the different raw materials can be considered at this time as one of the most relevant alternatives to investing in the stock market. But they provide a series of very own characteristics to open positions in their goods or products. To begin with, it is necessary that investors have a greater learning in the operations of these financial assets. Something that, on the other hand, does not always occur in this class of financial assets and therefore their positions are limited by not being able to operate safely. Among other reasons because with raw materials you can lose a lot of money in each of the operations if you do not know very well where you are or what market we are going to.
While on the other hand, to consider raw materials as a real alternative to investing in the stock market it is necessary to have a very deep knowledge of their markets. Where it plays a very relevant role to know the evolution of its technical analysis to be able to enter and exit the financial markets with guarantees of success. For this, it is essential that we know how to use the charts that are the ones that will determine the moment of their quotation because these financial assets are characterized by their high volatility in the configuration of their prices. With divergences in a session of up to 20% or even more in some very specific cases. You have to know how to operate with them because the risk shown by raw materials is very high and more than in buying and selling shares on the stock market.
Mechanics to operate with these assets
If we accept that raw materials is an alternative to investing in the stock market, we must be clear about a series of considerations from now on. One of them is the fact that these financial assets are very diverse and some have nothing to do with others. Investing in wheat is not the same as investing in crude oil. To the point that the mechanics are very different to operate with one or the other. Therein lies the key in the operations that small and medium investors are going to carry out from now on. It could be one of the most profitable options from this moment in a very, very complex year.
While on the other hand, we cannot forget at this time that raw materials are many ways, and of diverse nature, in which small and medium investors can take positions in this very special financial asset. How do you invest in commodities? Investing in commodities is very different from trading other types of investments. The biggest challenge with raw materials is that they are physical goods. There are four ways to invest in commodities:
Investing directly in the raw material can be done from the following investment approaches that we are going to expose below:
Using commodity futures contracts to invest.
Buying shares of exchange-traded funds that specialize in commodities.
Buying stocks in commodity-producing companies.
If you want to invest directly in the commodity itself, you have to figure out where to get it and how to store it. When you want to sell the commodity, you have to find a buyer and handle delivery logistics. With some commodities, such as precious metals, it can be relatively easy to find a local or internet coin dealer where you can buy a bar or coin that can be kept safe and freely sold. But in the case of corn or barrels of crude oil, it is much more difficult to invest directly in goods, and it usually requires more effort than most individual investors are willing to do.
Fortunately, there are other ways to invest in commodities. Commodity futures contracts offer direct exposure to changes in commodity prices. Certain exchange-traded funds are tailored to offer exposure to commodities. And if you want to stay in the stock market, you can always focus on companies that produce a certain commodity.
Benefits of operations
The benefit of owning a physical asset is that there is no middle man involved in your property. Typically, you can do a simple internet search to find a merchant who sells you a particular good, and when you no longer want it, that merchant will often buy it back.
The best products to invest in directly are the ones where the logistics are easier to handle. Gold is one of the best examples, because you can make a significant investment in gold without it being too bulky to transport or store efficiently. Traders will sell gold coins or bars to investors, and will also buy those commodities back when the investor wants to sell them. Local merchants can be found by word of mouth or through Internet searches, and some are rated by the Better Business Bureau or other rating services for reliability and trustworthiness. Exclusive dealers can also be found online through Internet searches, and they often have testimonials or reviews that can help you assess whether they are trustworthy.
The downside to direct ownership is that transaction costs tend to be high. For example, a gold coin dealer may charge a profit margin of 2% or more for the sale of a coin, but then offer a price equal to or less than market value to buy it back. This makes direct ownership better for commodities that are expected to be kept for periods of years rather than months or days, because total transaction costs are minimized by conducting relatively few operations.
As a diversified investment
In the aftermath of the financial crisis, the so-called 'commodity super cycle', driven by the enormous growth of the Chinese economy, meant that an investment in a diversified basket of commodities would have paid off well. However, this long-term performance includes periods of extreme short-term volatility that can affect different commodities.
Investors should be cautious when investing in individual commodities, particularly in the short term. It can be tempting to buy a publicly traded product that offers exposure to, for example, copper prices because it has been heard that demand may be increasing. But prepare for a volatile ride.
In 2002, a London-based hedge fund manager earned the nickname "Chocfinger" after storing 15% of the world's cocoa supply and generating a huge profit (Figure 3). He tried again in 2010 using the same approach and the fundamentals were on his side: recent harvests had suffered from bad weather and world stocks were running low. However, it is believed that this seasoned soft commodity trader may have lost money a second time due to technical market factors and the reaction of other investors.
Although extreme, this story highlights the challenges of investing in commodity markets. This is further complicated by the fact that, unless you have access to warehousing facilities and can accept physical delivery, the easiest way to gain exposure is through an investment vehicle, such as a product traded in purse or a structured promissory note. Many are cheap and liquid, but it is important to understand what you are buying.
For example, some gold exchange-traded funds closely track the spot price because they are backed by real gold bars, which are stored in secure vaults. Other products use synthetic derivatives, such as futures contracts. However, because commodity markets are complicated, your investment may fall in value even if the price of the underlying commodity has risen.
For example, a problem may arise if there is a large difference between the spot prices and the futures price when the time comes to renew the derivatives contract. This is because commodity markets tend to exist in one of two states. They are said to be in price when the forward price of a futures contract is above the expected cash or reverse future price, which is essentially the opposite.
Commodity companies
The main way to gain exposure to commodities is through the stock market by buying shares in mining or energy companies. However, there may be corporate governance problems and unstable political regimes in the countries where many of these companies operate. Commodity companies alone can generate huge profits, but more often than not, they produce spectacular losses; it is the nature of the industry.
Even with globally diversified mining companies, your investment can be undermined by an unforeseen problem in a particular mine or commodity market, as well as more general risks, such as the quality of management and underlying market conditions in the mine. values.
Private investors should also think carefully about the tax treatment of any commodity fund. For example, investing through an offshore vehicle is likely to result in an obligation to pay income tax on any profit, which would be up to 40% or 45% for taxpayers with higher rates, and therefore therefore it is inefficient.
With UK interest rates firmly anchored below 1% and unlikely to rise further in the near future, attention has turned to finding ways to beat inflation. Speculative investments in commodity markets may seem attractive, but we believe that a patient multi-asset approach is the best way to grow and protect wealth for the long term.
Invest in the real asset
The most direct method of investing in commodities would be the purchase of the commodity itself. Obviously this method only works with certain commodities, such as precious metals, but it is nonetheless a way to gain exposure in these markets.
If you wanted to invest in gold, for example, you could buy a gold bar. It is a quantity of refined gold that meets the standard conditions of manufacture, labeling and registration.
However, there are many problems with this form of investment. You have the immediate problem of having to store the asset. This type of investment is also relatively less liquid than others, so it is later more expensive to exchange. Similarly, since a gold bar is not divisible, its liquidity increases.
Investing in a publicly traded fund
On the other hand, many people who invest in commodities do so by investing in commodity-based exchange-traded funds (ETFs). An ETF is a fund that is traded on a stock exchange. An ETF can be made up of many different asset classes of stocks, commodities, or bonds. Some ETFs aim to track the price of the underlying commodity itself, such as physical gold ETFs. On the other hand, some will try to track a commodity through the composition of an ETF that may have shares of companies that extract or exploit that commodity. The latter type of ETF can be known to have a more divergent price than the underlying commodity.
Investing in a futures contract
Commodity futures are agreements to buy or sell a specified quantity of a commodity at a specified price and on a specified date in the future. A trader makes money if the commodity appreciates or depreciates relative to the fixed price, depending on whether he takes a long or short position respectively.
Futures are a derivative product, so you do not own the commodity itself. Buyers can use futures to hedge against the risks associated with price fluctuations (especially in the more volatile soft commodity markets), and sellers can use futures to "lock in" profits on their products.
Investing in commodity CFDs
Investors can trade CFDs on commodities as a means of gaining exposure in the commodity markets. A contract for difference (CFD) is a derivative product, in which there is an agreement (usually between a broker and an investor) to pay the difference in price of an underlying asset between the beginning and the end of that contract. You trade CFDs on margin, which means you only have to put in a fraction of the value of your trade. Leveraged trading allows traders to gain more exposure with a smaller initial deposit.