How To Make Money In Commodities
Many highly regarded investors and traders believe that we are at the beginning of a commodities supercycle. This means that the broad category of commodities will experience rising prices for many years to come. Oil in particular is expected to do well as the economy reopens and recovers from the pandemic recession. The pandemic recovery, as well as a suprasecular environment of low interest rates, expansionary fiscal policies, and rising demand, among other factors, is expected to drive this commodities supercycle. The question for you is, how do you make money in commodities? In this article, we will discuss just how to do that.
Commodities are highly volatile compared to asset classes like stocks, but they are potentially very high reward. Investors such as Jim Rogers have been arguing for decades that investors ought to consider commodities as part of their investment portfolio. A very important role of commodities is in increasing the asset diversification of a portfolio. Typically, investors put their money into stocks and bonds. Putting part of your income in commodities increases your portfolio's diversification.
Trading in commodities demands an awareness of what's going on in the world. You need to read the major financial newspapers, such as Wall Street Journal, the Financial Times, The Economist and others. You should also study macroeconomic data from the Federal Reserve, and other organizations. You also have to develop a sense of the outside view rather than the inside view, in order to make accurate forecasts about the movement of prices. To understand the difference between the outside and inside view, consider this example. If you want to understand what most Americans think about a subject, you can either extrapolate based on what you are experiencing or what your friends are experiencing. That is the inside view. It is subjective. Or, you can take the opinions of as many Americans as possible. Taking the outside view means thinking statistically rather than subjectively. Taking this position, it is possible to answer even questions in which it is difficult to get data, such as, "How many piano tuners are there in Chicago?"
You should not neglect to read important commodities blogs and newsletters, such as the Rare Metal Blog, in order to broaden your perspective.
Having developed the habit of statistical thought and reading widely for your information, you will form a thesis on what kind of investment position you want to take. There are many different commodities to trade in. You can invest in everything from soybeans to oil. You can either trade directly through futures contracts, or indirectly by investing in stocks of commodity producers or exchange-traded funds focused on the commodities industry.
Your aim should be to think like a scientist. Form a hypothesis, test it to see if it will be falsified or verified. Don't get attached to your hypothesis. It's more important to make money than to be right. Your job is to find the idea that makes you money, not to be right. There's a fine difference.